BoJ: Reduced expectations for tightening - Nomura

BOJ Governor Kuroda’s comments at his confirmation hearing in the upper house yesterday sounded more dovish than his last Friday, explains Yujiro Goto, Research Analyst at Nomura.

Key Quotes

“He clarified last Friday’s confusing comments. He said that “regarding exit, I did not say that we would make a change in FY2019, what I said was that the chances of inflation reading 2% in FY2019 were high,” and that “I never said we would be exiting immediately in FY2019.” While his inflation forecast remains optimistic, he repeated the BOJ’s CPI inflation forecast entails downside risks and the 2% inflation target is still a long way from being achieved. As the BOJ’s inflation forecast is unlikely to materialise, a BOJ exit policy is unlikely anytime soon. In fact, Mr. Kuroda also said less stimulus is unthinkable before reaching the inflation target.”

“The two deputy governor nominees’ confirmation hearings in the upper house today were not so different from Monday’s hearing. Mr. Wakatabe said his previous stance as an economist is different from now, suggesting he is likely to be more realistic, while maintaining his dovish stance. He repeated that he is not excluding the possibility of proposing extra easing, while not providing details on any possible proposal. Mr. Amamiya’s stance was again more balanced, but he said Japan was still quite a long way from achieving stable 2% inflation and is now not at point for considering exit in detail. His comments are closer to that of Governor Kuroda, showing a low possibility of a near-term tightening.”

“Unsurprisingly, Governor Kuroda also reiterated the importance of wage increases, stating that he is paying close attention to wage growth reaching 3%. Mr. Amamiya also said GDP and wages are the among factors for examining price stability. The result of the spring wage negotiations will be important for the BOJ. Our economists are pessimistic on wage growth acceleration this time.”

“After recent market moves and the change in the BOJ leadership, expectations for a BOJ tightening by year-end have declined, according to a Bloomberg survey. Less than one-third (27%) expect the BOJ to tighten by year-end, while nearly half (47%) expect a tightening as of January. We expect Governor Kuroda to remain dovish this Friday, and the likelihood of a BOJ tightening by year-end stays low, limiting JPY appreciation based on BOJ normalisation expectations.”