Economics

BoJ to remain dovish as inflation disappoints

Quickview: Lower-than-expected inflation release means the Bank of Japan is likely to keep interest rates at lows

20 July 2018

Piya Sachdeva

Piya Sachdeva

Economist

Underlying inflation undershoots expectations

Core inflation, as measured by the Consumer Price Index (CPI) excluding fresh-food and energy, unexpectedly slowed in June from 0.3% year-on-year (YoY) to 0.2%. This compares with consensus expectations of a tick up to 0.4% following a rise in the June Tokyo inflation print, which tends to lead the national series.

CPI excluding fresh food, which is targeted by the Bank of Japan (BoJ), edged up to 0.8% YoY driven by higher energy prices. However, inflation remains well below the 2% target set by the central bank.

BoJ to stay on hold

This inflation release will be a disappointment for the BoJ ahead of its next monetary policy meeting at the end of the month. We expect the central bank to keep monetary policy unchanged. Under yield curve control, which began in September 2016, the BoJ pledges to keep short-term interest rates at -0.1% and guide the 10-year government bond yield to “around zero per cent”.

The BoJ will also publish its new Outlook report, where the prospects for inflation are likely to be downgraded given the disappointing inflation data for the second quarter as a whole. This means the BoJ should maintain its dovish stance, highlighting the continued need for powerful monetary policy with persistence.

Trade wars also on the radar  

Following the announcement of the US administration’s intention to apply tariffs on an additional $200 billion of Chinese goods, the trade spat between the US and China is threatening to escalate into a trade war. This is likely to have spill-over effects to the wider Asia region. While we do not expect this to impact monetary policy at this stage, some board members of the BoJ are likely to voice some concern on the risks to global trade.

The recently agreed EU-Japan trade deal, which has been in the works for years (and is expected to come into force in 2019), confirms Japan’s stance on free trade. Japanese Prime Minister, Shinzo Abe, said: "…we are sending out a message emphasizing the importance of a trade system based on free and fair rules."

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.