Bank of Japan Kept Its Monetary Policy Unchanged

Markets

The Bank of Japan kept its monetary policy unchanged this morning with a -0.1% policy rate and a 10-yr JGB target with a “soft” upper bound of 1%. In its new policy forecasts, the BoJ kept its inflation forecast for the current fiscal year unchanged at 2.8%, while lowering it from 2.8% to 2.4% for the fiscal year starting April 2024 (especially because of declining oil prices) and slightly increasing the one for fiscal year 2025 from 1.7% to 1.8%. Risks to the forecasts are “generally balanced” over the policy horizon whereas the BoJ previously suggested that the 2025 projection was skewed to the downside. The outcome of spring wage talks (shunto) seems to be the pivotal moment for the BoJ to whether or not proceed (more rapidly) with its policy normalization process. The BoJ’s wants more signs on the risks of a wage-price spiral before acting. The Japanese central bank pencils a growth path of 1.8%-1.2%-1% for fiscal year 2023-2025 compared with 2%-1%-1% in October. The outcome of the meeting was as broadly expected and doesn’t impact Japanese bond markets. The yen initially prevented more losses, but this was more thanks to the Friday-Monday comeback of core bonds rather than with the BoJ outcome. It even started appreciating a bit during BoJ governor Ueda’s press conference as he said to mull if negative rates should be kept if the price goal is in sight. The currency is nevertheless in desperate need of some firmer backing. USD/JPY rose towards the 148-area prompting a first FX intervention warning by Fin Min Suzuki on Friday. End 2022 and end 2023, the USD/JPY 150-zone has proven critical resulting in effective interventions (2022) and significant verbal warnings (2023).

Today’s eco calendar remains rather soft ahead of EMU January PMI’s (tomorrow), 4^th quarter US GDP data and the ECB policy meeting (both on Thursday) later this week. Blackout periods hold central bankers back from commenting, though the ECB with its quarterly Bank Lending Survey still publishes a key piece of information today. Other things to watch are the January Richmond Fed Manufacturing index in the US and EMU consumer confidence. The US Treasury starts its end-of-month refinancing operation with a $60bn 2-yr Note auction while Q4 earnings season gets more and more traction with Netflix today’s highlight after US close. Investors since Friday turned to a more neutral approach going into key ECB and Fed (next week) meetings after scaling back end 2023 aggressive policy rate cut bets. We nevertheless think that too much policy easing is still discounted. In that same move, the dollar gives away some ground (EUR/USD 1.0910) while stock markets flourish. Both the US Dow Jones and S&P 500 yesterday closed at record levels for a second straight session.

News & Views

Chinese authorities are considering a package of measures to stabilize the slumping stock market, Bloomberg reported citing people familiar with the matter. Policymakers are said seeking to mobilize about 2 trillion yuan; mainly from offshore accounts of Chinese state-owned enterprises, as part of a stabilization fund to buy shares onshore through the Hong Kong exchange link. Officials also are said to have earmarked at least CNH 300bn of local funds to invest in onshore shares. Other additional measures might still be added to the plans and concrete steps might be announced as soon as this week. The ‘plans’ are aimed at restoring confidence as Chinese equity markets are under heavy selling pressure with the CSI 300 touching the lowest level in about 5-years. The CSI 300 reversed an earlier loss, but gains currently are still very modest at +0.5%.

According to a survey of National Australia Bank, business conditions softened further in December from 9 to 7. Business confidence still improved from -8 to -1. However, especially subseries on prices and costs have eased substantially compared to the previous month. Labour costs eased from 2.3% Q/Q to 1.8% Q/Q. purchase costs slowed from 2.5% to 1.6% while price growth for final products declined to 0.9% from 1.2%. Capacity utilization also eased from 83.6% to 82.7%. Indications on price growth should give the Reserve Bank of Australia some comfort as it currently maintains a wait-and-see approach after raising the policy rate to 4.35%.