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Given the confidence the bank has been expressing, the BOJ meeting this week was disappointing. By raising the RRR, Taiwan's CBC, by contrast, was somewhat hawkish.
Of course, headline data matter. But not as much in Japan as elsewhere. Official data don't suggest a tightening economy, but in the last 6M, the BOJ has nonetheless become more confident that Japan is heading to sustainable inflation. We'd expect more rate hikes soon.
Wage growth in Japan is solid, and the macro backdrop, such as today's services PMI, indicates is probably accelerating. However, the pick-up isn't showing up in all the data.
Data this week show a return to JPY-driven inflation that erodes consumer incomes and spending. But shifts in BOJ language suggest a central bank that is less doveish, a shift that should start to matter for the currency.
We have a look at services price momentum and the BOJ view, with April services CPI, services PPI, and deputy governor Uchida's speech yesterday, remarks that he concluded by saying: "this time is different"!
The April national CPI data only have incomplete hints of the transition the BOJ expects to domestically driven inflation. The more obvious trends for now remain renewed JPY weakness and labour market tightness.
GDP contracted again in Q1. The big driver remains the weakness of consumption, dragged down by the weak JPY and inflation eating into real incomes. Partly as a result, it seems to us that the BOJ is signalling it will raise rates more than the market currently thinks.
It feels to us that, with so much of the market's focus being on $JPY and the MOF, not enough attention has been paid to the increasing confidence being expressed by the BOJ.
Part-time wage growth is now finally reflecting the labour market tightness seen in survey data, and so supports the BOJ's confidence in the macro cycle.
The boxes in the BOJ's full outlook report present a clear explanation of the bank's confidence around wages and prices, and hint at the policy implications.
The BOJ didn't change policy, but once again, sounded incrementally more confident, issuing a FY26 core inflation forecast of +2.1%. That outlook makes policy rates still near zero look very low.
While not yet certain, it looks like the recent fall in services PPI might be bottoming. That is important for a BOJ that will want to sound more hawkish given rising $JPY.
Export volumes haven't responded to JPY weakness, but profits have. That's feeding into manufacturing sentiment, which is better than history, and better than the rest of the world. With services sentiment also strong, the BOJ can continue to argue the macro cycle is warming up.
We estimate that sequential core CPI inflation turned negative in March. The macro backdrop suggests that should be temporary, but uncertainty about the real strength of the domestic inflation dynamic constrains the BOJ's ability to respond to the unhelpful weakness in the JPY.
We take a detailed look at services prices, which account for 50% of the CPI basket, and need to continue to rise if inflation is to be sustained.
Consumer confidence for March gives reasons to think that stronger consumption will drive continued economic recovery in 2024.
The details of the Tankan survey reinforce the message of the headlines: the labour market is tightening further, and price pressures are rebounding.
The headlines from the Tankan look pretty positive for the BOJ, with sentiment solid, the labour market tightening further, output prices easing only slightly, and capex plans holding up.
The upside risk for Japan and the Bank of Japan is a fall in headline wages and a long-awaited recovery in consumption that lifts aggregate demand. There are some signs of that process falling into place, but they remain tentative.
Former BOJ governor Shirakawa continues to argue Japan's problems are about demographics, not deflation. His thesis is worth studying, even if it is not shared by the current leadership in the bank.
Not just in Japan but Taiwan too, there are signs of a structural break from persistently low wage inflation. The implication is that the gap between nominal monetary settings between both and the US is likely to be narrower in the future than it has been in the past.
Two recent surveys from the Cabinet Office highlight Japan's labour market tightness. In its annual survey released at the end of February, hiring intentions are the highest since the 1990s. And today's quarterly survey shows worker shortages rose again from Q4.
It was no surprise that capex was revised up in the second release of Q4 data, but consumption was revised down. We would expect consumption to recover from here, as imported inflation eases and nominal wage growth accelerates.
Even more than the PMI, the EW survey points to Japan's cycle having decent momentum. There is upside risk around that, because consumption has yet to recover, while it looks like the shunto wage round will be strong. That is the backdrop for increasingly confident commentary from the BOJ.
Headline inflation in Tokyo in February rose from 1.8% YoY to 2.6%. So inflation isn't disappearing. But underlying measures don't suggest that inflation really is accelerating either, with core settling around 2% annualised. At the same time, the PMI shows services momentum remaining firm.