Tomorrow sees the release of the latest CPI report from the BOJ. But analysts generally expect it to largely feed into general rhetoric that seems to suggest that ultra-easing won’t change. The thought was that if inflation picked up in Japan, then the BOJ would be forced to take a more hawkish stance. But the faster growth in prices over the last several months is fading. And it comes at a crucial time for when there was initially speculation that negative rates would be ended.
Japan headline inflation is expected to be reported at 2.1%, down from 2.6% previously. The monthly rate is actually expected to slip into deflation to -0.1%. What is worrying policymakers is that slow price growth appears to be driven by slack consumer demand. That would imply that the yen has more room to become even weaker.
Low Costs Are Bad for Inflation
The core rate is expected to slow even further, dropping below the BOJ’s target of 2.0%. With the annual core rate forecast at 1.8% compared to 2.3% prior, the argument for tightening monetary policy will become difficult. More voices have joined recently arguing against leaving ultra-easing in place. Just this morning, ex-Cabinet advisor Etusro Honda saying it was too early to end negative rates.
The thought before was that a weak yen would translate into higher costs for imported goods. Which in turn would drive inflation. Japan relies heavily on imports, given its relatively small land mass, particularly of energy. But with the USDJPY going back above 150, the price pressures haven’t manifested. On the one hand, weaker global data has left crude prices on the backfoot.
The Worrying Trends for Growth
On the other hand, the higher prices of imported goods simply means that Japanese consumers don’t buy, as the lack of economic growth has left shoppers less active. The focus has become increasingly intense on the spring labor negotiations, as higher wages are needed to keep people spending.
Last year around this time the economy was showing green shoots. Wages rose substantially, as businesses had an optimistic outlook for the economy. Subsequently, inflation was higher. But that came to an end just a few months later when Japan fell into a technical recession. The outlook among Japanese businesses is poor. The latest PMIs show a return to contraction. It’s hard to see a willingness for businesses to substantially increase wages if they don’t expect sales to grow.
The Crucial Juncture
March was expected to be the month of ending negative rates, as that is when the BOJ is expected to receive the conclusion of its study on the effects of hiking. The overwhelming consensus for months now has been that the conclusions would be positive, and that the BOJ would hike in response.
But with inflation falling back below target and the economy in technical recession, that’s not such a foregone conclusion anymore. It would require a substantial turnaround in those key indicators to convince more traders that hiking is still on the table.
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