The BOJ remains the major outlier in a world of rising rates. We expect the market to eventually test the bank’s resolve to maintaining YCC, something that hasn’t happened since mid-June. That said, we believe the BOJ has unlimited firepower here and is unlikely to blink. Despite recent yen strength, we believe the USD/JPY rally remains intact given ongoing monetary policy divergences between the hawkish Fed and the ultra-dovish BOJ. Kuroda also touched on the exchange rate, noting that “If you were serious about stopping the weaker yen just with rate increases, you would need significant hikes and they would be very damaging to the economy.” Official concern about the exchange rate was likely focused on the pace rather than any particular levels. As such, we believe FX intervention is very unlikely for now.
The latest macro forecasts suggest no need to tighten. Yes, core (ex-fresh food) inflation is currently running slightly above the 2% target but the forecasts show that it is expected to fall back below in the next two fiscal years. Much of the rise in core measures is stemming from energy costs. Stripping out both fresh food and energy, inflation is only running around 1%.
|BOJ Forecasts from July (April)
|Core CPI (ex-fresh food)
Kuroda’s replacement has not been named yet but the choice will be key in determining the timing of BOJ policy normalization. The two Deputy Governors Masayoshi Amamiya and Masazumi Wakatabe are seen as potential successors to Governor Kuroda. Many at the BOJ believe that besides hitting the 2% inflation target, higher wages are also needed to justify liftoff. Amamiya recently expressed concern about rising wages next fiscal year, while Wakatabe has sounded less concerned. Of note, both of their terms end in late March but are widely expected to be appointed to a second 5-year term. Another potential candidate is former Deputy Governor Hiroshi Nakaso, who served during Kuroda’s first term and currently heads up a private sector research institute. We expect to see some hints of progress on the succession process this autumn.
Dollar Bloc and Scandies
Made up mostly of commodity currencies, the dollar bloc and Scandies are most at risk from slowing global growth. Yet the central banks continue to tighten in order to help limit inflation. The RBNZ is expected to hike its policy rate to 4.0% over the next 6 months. Although it was the first of the majors to hike and one of the most aggressive, it has not helped NZD very much as it is the worst performing YTD within the dollar bloc. Elsewhere, in Australia, the RBA is expected to hike its policy rate to 4.2% over the next 12 months. The economy is heavily dependent on exports to China. With the mainland economy slowing sharply, it is only a matter of time before Australia also feels the chill. CAD has been the best performing major currency YTD, due in large part to its status as an oil exporter as well as its strong ties to the U.S. With the U.S. economy remaining resilient, this should help Canada weather the storm as well. The BOC is expected to hike its policy rate to 3.75% over the next 6 months.
Norway is also a major oil exporter, which has helped NOK outperform within the Scandies. Norges Bank is expected to hike its policy rate to 3.25% over the next 12 months. Of note, new Governor Bache began tightening at her first meeting in March. On the other hand, Sweden is heavily dependent on trade with the eurozone, which is slipping into recession even as the ECB tightens and energy shortages loom. No wonder SEK is the second worst performing major currency YTD, ahead of only JPY. Yet the Riksbank is expected to hike policy rate to 3.0% over the next 12 months. Erik Thedeen will become Governor after Ingves’ term is over at the end of 2022 and he is expected to continue the tightening cycle.