Shoki Omori is the Chief Desk Strategist at Mizuho Securities in Tokyo. And as the Bank of Japan winds up day one of its two day policy meeting he is waiting to see what kind of signals Bank of Japan Governor Kazuo Ueda sends at his press conference as to what the BOJ needs to see before it starts hiking interest rates.
With the BOJ’s key inflation gauge rising steadily, hitting 2.9% on a year-over-basis, he expects the BOJ to raise its inflation forecast for the year. And this in turn to be an important step to hiking its key rate by 25bps in October, a more aggressive call than those who say there will be no rate hike until early 2026.
On the political front the failure of Japan’s prime minister to win a recent Upper House election, and his refusal to step down from office as many are calling for, has traders waiting to see what fiscal policy steps like consumption tax cuts may be taken win back some voter support even if it’s at the cost of seeing the government’s big budget deficit get even bigger
So dive in and hear what Shoki has to say. Not only about what the BOJ will message today, but what it will be watching to determine where it goes in the months ahead.
No rate change at his meeting 00:01:11:21
I think they'll keep it steady at this meeting. But the in terms of communication, I think they will obviously revise up the inflation forecast, which is already in the news or and they will be a little bit, I think, hawkish in terms of inflation expectations, because obviously inflation has been hot in Japan and now that we have the election over and we have trade policy change, trade negotiation somewhat over, WGA can now go really in terms of communication and try to price a hike within I guess this year, which I am expecting in October and even further ahead they could possibly hint for even higher rate.
Japan inflation has sprung up from nothing to something 00:03:08:11
Japan's inflation has been obviously zero for the past few decades, and now we're at 3.4%. So households are not used to it and not used to these kinds of sticky inflation. I mean, 2.9% itself is pretty high. And we're now about 3.4%, which of course, obviously does hit households because on the backside, real wages are going negative even though we are seeing a pickup in wages.
The BOJ wants to stop inflation but keep wages rising 00:03:46:05
The good side for the BOJ is that the wages are picking up. We're seeing basically wages are picking up around 2%-ish in terms of nominal. But I put that in real context. It's negative. So we want the real wages to be positive. So in that sense, I think the view is you would want to hike and cool inflation down. Okay. It's interesting too, because that's the part of it that you have to be aware of, that there are wages, but real wages are what matters. And particularly when you have a basic commodity like rice, where prices are going up so much in Japan, that's that hits a lot of families pretty hard, right?
BOJ will likely wait and see and be data dependent 00:05:36:00
Kathleen: Again, some people aren't looking <for a rate hike> ‘till 2026. Right. Would that be another pressure for the BOJ to move sooner rather than later?
Shoki: I think Governor Ueda is going to communicate, saying something like it's going to be data dependent and they're going to cautiously watch the situation on the political front. But on the data front as well, they would want to see demand picking up, constant consumption picking up and inflation cooling. But if that's not the case, they have to go quickly. So I don't think he will make any major statements. He will just guide the market saying that it's going to be data dependent, which is the key point here.
BoJ not set to hike but it could have its hand forced 00:07:30:11
I think that the BOJ does not hike them., I think the BOJ would have to go for a hike and tighten policy whether or not they see good data. So that's I think that's the case. And for the BOJ. I guess that BOJ officials are seeing no need to shift their current policy stance. That is gradual raising rates even after the prime minister's big election setback. But they're watching for any change in fiscal policy.
There will be a fiscal response 00:10:00:05
I do think that the current Prime Minister, Ishiba, would need to do something having just seen this result in the elections. So I do think that they will push something out quickly. So this one and doing that, also hoping that this will boost his popularity or, you know, at and help the ruling LDP party stay with somebody in office, even if it's not Ishiba somebody else is out. The idea and is that one of the more reasons than people and especially investors and traders are going to be saying, hey, we're going to watch that closely because we know there's going to be you know, there's gonna be a lot of politicking now, you know, from every party. And certainly the party in power is the one who has the best chance to do something that people will like and help their candidate.
Japanese real money investors are marking time 00:12:31:17
Japanese investors, real money investors, the big life insurance companies, have been quiet in the long game. That's why we have lost support in the longer part of the curve and other investors as well. And you're seeing they are waiting for the Fed in the U.S. to act or they're waiting for fiscal policy to come out.
Markets have stabilized after some turbulence 00:13:12:03
So they have been pretty quiet over the past few months. And of course, before the election, different people are saying that we have to wait on the election. We have to wait for the tariff negotiations to come out. Otherwise, they can't do anything. Looking ahead, yes, I think the market has stabilized.
Foreign investors flocked to yen then got stung 00:14:11:10
I think I think for foreign investors, it was a good opportunity to invest. And we have seen money flowing into Japan, into the hundreds. But then as the yields went up, they had to cut their losses.
A positive reaction to the trade deal- 00:15:48:08
Looking at the market reaction, especially and the yen going back, to Yen 148 after having a deal, this is I think, a surprising upside for the market. So, going ahead, we could see, more negative headlines coming out. But I don't think this is big, I would say not a big deal.
Not many positives from the US trade deal for manufacturing 00:16:48:05
If you look at things like the PMI survey for Japan, if you know, there's questions about what the currency is going to do is again, for investors, in terms of watching the economy; that means you're watching the BOJ. Is Japan's manufacturing, going to rebound? Will the U.S. trade deal hold it back or, you know, somehow manage to be some kind of a boost? Well, it's obviously a negative because we don't basically export manufacturing goods from Japan and so even for the big companies which have factories over all over the world, it's going to be an export to the US mainly.
Policymakers mark time to see the impact of the tariffs 00:17:40:10
So that is going to be see bad, but we just don't know how much of an impact of it we are going to see from the new tariffs just yet. So that's why I think the BOJ and the market are still waiting to see the real impact, not just the big headline that delay struck, but the actual data and how much interaction we see in exports and especially the auto industry and semiconductors, for example.
Waiting on the Fed, perhaps to do nothing 00:19:03:24
So in the end, I think I think the US, US producers are going to get helped in terms of the prices. And I think that's disadvantageous for the US customers. That's what I think. But I guess as we look at the BOJ, you think they will raise your inflation forecast there, do you think and do you think that they'll expect more? Some people are expecting a lot of people are expecting the Fed not to do anything to rates. Soon we're going to get the result.
