- Risk of inflation overshoot is bigger than risk of recession
- For now, not expecting a sharp deterioration in the economy
- But depending on Middle East conflict, our view on economic outlook could change
- There is some time before June policy meeting
- Will continue to look at any changes in the balance between prices and growth risks
- Must guide policy to avoid being behind the curve on inflation
- Compared with the past, there is a stronger role that the BOJ must play in using monetary policy to cope with inflation
There’s certainly a slight hawkish leaning to her remarks. And that aligns with market expectations of leaning more towards a rate hike in June. As things stand, traders are pricing in ~76% odds of a 25 bps move by the BOJ next month.
However, their job is certainly made complicated by the evolving US-Iran conflict. Higher energy prices continue to put upwards pressure on the broader inflation outlook. However, that is largely due to cost-push factors and is something that the BOJ does not want to react towards.
That being said, wage pressures are also moving up and the central bank had been teeing up a rate move using that as a base platform. So, it’s a tough one to suddenly need to find reasons to be more prudent instead.
At the same time though, they are under heavy scrutiny amid the Japanese economy taking a heavy hit from surging energy prices and also mounting fiscal worries. All of that of course ties to the Middle East conflict but the spillover impact has been rather profound in Japan.
As such, raising interest rates during this time is also a difficult choice as it risks worsening the fundamental outlook for the yen and the economy in general.
