JPY: Majority expects BOJ easing by July – Nomura

Yujiro Goto, Research Analyst at Nomura, suggests that the Consensus forecast shows that Japan’s inflation is likely to remain weak, although oil prices have recovered, according to JCER (25 May to 1 June).

Key Quotes

“The FY2016 core CPI inflation forecast has been downgraded slightly to +0.13% y-o-y from +0.16% the previous month. The BOJ forecasts +0.5% in its latest outlook report, but the market remains sceptical about the BOJ’s optimistic inflation forecast. Consensus’ forecast for FY2017 GDP growth has been upgraded to +0.95% y-o-y from 0.00%, as Prime Minister Abe has decided to delay the sales tax hike scheduled from April 2017.

Nonetheless, the FY2017 core CPI inflation forecast remains largely unchanged at +0.84% y-o-y from +0.83% the previous month. The newly released FY2018 core CPI inflation forecast is +0.99%, much lower than that of the BOJ’s latest forecast of +1.9%. The market remains doubtful about the BOJ’s capability to raise inflation to the 2% price target even in FY2018.

As a result of its pessimistic inflation outlook, expectations for a BOJ easing remain high. 26% of private forecasters expect the BOJ to ease in June, while 79% expect an easing by the July meeting. From the previous survey, expectations for a June easing inched down, but expectations for a BOJ easing in June and July remain elevated (see “JPY: Can Japanese policy weaken JPY?”, 17 May 2016).

In a different survey conducted by Nikkei Quick (6 June), Japanese financial market participants in the equity, bond and FX markets also see a strong likelihood of a BOJ easing by July. Although 23% of participants expect the BOJ to ease in June, in the equity market 35% expect a BOJ easing in June, showing higher expectations in the equity market. Bond and FX investors were more cautious on the possibility of an imminent BOJ easing (11% and 17% expect a June easing respectively). At the same time, the majority of participants in all three asset classes expect a BOJ easing by July.

We agree that weak inflation momentum and the JPY’s recent appreciation point to a strong possibility of a BOJ easing by July. Fundamentally, July may be better timing for a BOJ easing, as the Bank upgrades its economic forecast, uncertainty on the EU referendum disappears, and the Bank can monitor the July BOJ Tankan survey, while to surprise the FX market positively, a June easing would be better timing for the BOJ as only 17% of FX market participants expect a June BOJ easing.”