Don’t expect tighter monetary policy in Japan anytime soon

BoJ Governor Haruhiko Kuroda. Hannelore Foerster/Getty Images
  • Japanese inflationary pressures weakened further in the year to December.
  • Excluding fresh food prices, CPI grew by just 0.7%, down from 0.9% in November. Inflation was even weaker when both fresh food and energy prices were excluded, lifting by only 0.3%. The BoJ’s inflation target is 2%.
  • The BoJ meets next week. Markets widely expect it will keep policy settings unchanged and lower its inflation forecasts.

Don’t expect tighter monetary policy in Japan anytime soon.

Inflationary pressures remained ice-cold in December, moving further away from the Bank of Japan’s (BoJ) 2% target.

In the year to December, consumer price inflation (CPI) less fresh food prices — the BoJ’s preferred measure of inflationary pressures — grew by just 0.7%, down from 0.9% in the 12 months to November.

It now sits at the lowest level since May 2018, and well below the BoJ’s target.

Excluding both fresh food and energy prices, CPI increased by an even smaller 0.3%, unchanged from the pace seen in November. That indicates that even with the sharp decline in global crude prices in late 2018, most of the underlying price pressures last year still came from higher energy prices.

CPI less fresh food prices is shown in red in the chart below, with CPI less fresh food and energy in white.


With inflationary pressures still incredibly weak, James Lee and Barak Hurvitz, economists at HSBC, say the BoJ will have little choice but to keep monetary policy settings unchanged when it meets next week.

“We expect the Bank of Japan (BoJ) to keep its accommodative policy stance unchanged at the upcoming policy meeting on 23 January, maintaining the policy balance rate at -0.10% and the 10-year Japanese Government Bond (JGB) yield anchored ‘around’ 0.00% [with a tolerance of a 20 basis point movement in either direction],” they wrote before today’s data was released.

“With inflation low, the BoJ is likely to stand pat in 2019.”

HSBC, mirroring broader markets views, says the BoJ will likely lower its inflation forecasts in its updated economic projections, something that has become the norm, rather than the exception, over the past decade.

While there have been encouraging signs for Japanese wage pressures in recent months, HSBC says further substantial progress will need to be made if the BoJ is to ever achieve its inflation mandate.

“Tight labour market conditions have propelled average monthly cash earnings (AMCE) up to an average 1.5% year-on-year in the year through November 2018, the highest level in more than two decades,” Lee and Hurvitz wrote.

“However, we believe wage growth would have to further accelerate to 3-4% in order to catalyse inflation to reach the BoJ target.

“Since the wage setting behaviour is closely linked with the long term growth outlook, any further price gains from wages would have to come from higher potential growth.”