- Before the Middle East conflict, underlying data showed that we are “on track”
- All things being equal, surging oil prices can push up inflation and curb economic output
- A rate hike is still possible if economic downturn proves to be temporary, doesn’t affect underlying inflation
- We held rates steady this month since we put emphasis on lower visibility on likelihood of achieving inflation target
- Underlying inflation is gradually accelerating towards our 2% target but it is not fixed
- We are some distance from the target inflation rate still now
The main takeaway from Ueda and the BOJ today is that they would like to be in a position to tee up the next rate hike. However, the Middle East situation in the past two weeks have certainly complicated things.
Even if it pushes up price pressures, it is not the kind the BOJ really wants. The central bank wants inflation driven by rising wage pressures and not cost-push factors, such as higher energy prices. So, they’re very much in a dilemma now.
And much like what all central banks want to play for at this point in time, Ueda is stressing a lot on optionality. Even if the market volatility and added uncertainty to the outlook, he still says that the central bank could hike even during a “temporary” downturn in the economy.
In his previous communication stance, he has only went as far as saying that they will continue to raise interest rates “if the economy, prices move in line with forecasts”. So, to switch it up a bit goes to show that the central bank still has the appetite but only under the right circumstances.
If not careful, I’m afraid the BOJ might have missed their timing on this one. They barely got in the October move as Takaichi was still consolidating her fiscal planning. And in now wanting to wait for the outcome of the spring wage negotiations, they might’ve just let it all slip by this time around.
