BOJ to End Negative Rate Policy?

Japan’s most recent report on inflation gives the BoJ another reason to wait beyond tomorrow's meeting before ending the negative rate policy. The report strengthens the argument for a potential interest rate hike in the months to come.

• Growth in consumer prices (fresh food excluded) slowed to 2.3% in November from a year earlier.

• Deeper drops and gas prices, as well as a slower pace of 2.3% gains for processed food weighed on the index.

The data suggests that there is no urgent need for the Bank of Japan to rush into making its first-rate hike since 2007 at its January meeting, with April touted by many economists as the most likely month.

 

The BOJ had already predicted that cost-push inflationary pressure in Japan will be easing, which has been confirmed by Friday’s data.

• Older data showed that December’s PPI was flat compared to a year earlier, the weakest showing in almost three years.

• Consumer price gains in Tokyo eased the same month to the slowest it has been in over a year.

“Cost-push inflation has eased a bit, but whether this will transfer into demand-pull inflation can’t yet be confirmed,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.

Despite a 2.3% rise in service prices, there is a common belief that the BOJ will continue its path toward policy normalisation.

The deceleration in inflation is seen as temporary, and there is an expectation that the BOJ might keep forecasting inflation around 2%, allowing for policy changes.

What's Good to Read With This Article: Japan's Nikkei Hits ATH After 34-Year Hiatus

While some economists also predict a possible interest rate hike in April, they now unanimously expect the BOJ to maintain its negative interest rate at the upcoming meeting, mentioning the need to assess the impact of the recent earthquake that hit the country.

Bloomberg Economics suggests that the CPI report doesn't necessarily assure the BOJ that its 2% target is secure, and it is expected to maintain its current policy. Governor Kazuo Ueda anticipates inflation picking up after a temporary lull, with annual wage talks in March being a key focus.

Lastly, the recent depreciation of the yen against the dollar could potentially lead to import price pressure in the upcoming months, possibly influencing inflation dynamics.