DFJ - The Bank of Japan's New Path Ahead

2024-04-11 07:20:00 ET

Summary

• The Bank of Japan is set to normalise monetary policy when certain conditions are met, namely inflation, positive real cash earnings, and a recovery in domestic demand growth.
• We expect the window for normalisation to open from July for about a year before inflation begins to fall below 2%.
• The prospect of rising uncertainty into and around the US presidential election in November looks likely to drive higher FX volatility.

By Min Joo Kang & Chris Turner

Back in March, the Bank of Japan made a big decision to raise rates for the first time in 17 years in the hope that higher wage growth would lead to a recovery in consumption and, therefore, keep inflation at the central bank's target in a sustainable way. The BoJ justified its decision by reiterating that monetary conditions will remain accommodative despite the end of negative interest rates and yield curve control policies. We think Governor Kazuo Ueda's post-meeting comments were more neutral rather than dovish. The minutes of the BoJ's meeting in January also quite clearly showed its actions would depend on upcoming data....

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