BoJ: Normalization unlikely given risk of yen appreciation – Nomura

According to media reports, the BOJ is considering lowering its inflation forecasts for FY18 and FY19 at its July monetary policy meeting in response to weak wage growth and inflation, notes the research team at Nomura.

Key Quotes

“If it does, this will be the second downward revision of the forecast for FY18, following an earlier one in April.”

“Based on comments made to date by Policy Board members, we think that the BOJ probably sees the temporary expansion in labor supply and improvement in productivity that occur during the early stages of a long recovery after a deep recession, viewed by economists as "the reversal of hysteresis," as the main factors behind the recent weakness of wage growth and inflation. If this is indeed the case, the BOJ is likely to maintain its view that underlying inflation has not lost momentum.”

“At the same time, however, it is also giving more consideration to the secondary effects of its current monetary policy, and while the BOJ is likely to lower its inflation forecasts, it is also becoming increasingly aware of the need to normalize monetary policy at some point. If the BOJ were to normalize its monetary policy, we think it would probably go about this by steepening the yield curve or attempting to shift the yield curve upward.”

“That said, if market participants were to think that the BOJ had become more hawkish, the yen would probably appreciate again, as it did in early 2018. If the yen were to strengthen, core CPI inflation, which is currently below 1%, would probably come under even greater downward pressure, while exporters would find their margins squeezed even more tightly, and the economic recovery could slow. For this reason, we think that the BOJ will find it difficult to suggest normalizing its monetary policy and is unlikely to move toward normalization at its July policy meeting.”