Japan Macro Watch: Strong pricing dynamics keep the BoJ on alert

Research evidence excerpt

Japan Macro Watch: Strong pricing dynamics keep the BoJ on alert

Rising inflation risks reinforce our Oct rate hike call

This week’s data confirmed not only the resilience of economic activity but also This week's data increased upside

increasing inflationary pressures. As a result, we maintain our call for a BoJ rate hike in inflation risks and showed an

October. The output gap released today also confirmed that demand continued to improving output gap, reinforcing

exceed supply in Q1, with the gap remaining positive at 0.53%, reinforcing the potential our call for an October rate hike.

demand-pull inflationary pressures.

In addition, the yen remains weak against the US dollar. The BoJ has repeatedly The inflationary pass-through from

emphasized that exchange-rate fluctuations have become more likely than in the past to yen depreciation remains an

feed into domestic prices. Against this backdrop, the risk of further inflation pass- additional concern.

through from yen depreciation remains a concern.

However, government communication remains a

source of uncertainty

However, the key risk to our earlier rate hike call stems from the government. The draft Signs of government influence over

of the government's annual Basic Policy on Economic and Fiscal Management and the BoJ appear to be intensifying.

Reform ("Honebuto" policy) released this week included the statement that “it is

extremely important that appropriate monetary policy be conducted,” reinforcing

perceptions of government involvement in BoJ policy decisions. We view this as a

negative development. The episode has revived concerns that the BoJ could once again

fall behind the curve.

Moreover, market concerns are not limited to monetary policy. The draft Honebuto Market concerns about government