At the press conference, Deputy Governor Uchida struck a somewhat hawkish tone in our view. Still, he didn’t give clear guidance on the timing of the next rate hike or the likely terminal rate of the hiking cycle. He spent ample time emphasising upside inflation risks, though, noting that FX pass-through to inflation has increased meaningfully and that the positive wage-price cycle remains firmly in place. He also noted that financial conditions remain accommodative despite rate hikes. He cautioned that the neutral rate is difficult to estimate precisely — and the wide range of estimates makes it hard to use as a practical policy guide. This ambiguity will likely disappoint market participants.
Listening to Uchida’s remarks, the timing of the next rate hike will likely depend on how quickly energy supply disruptions are resolved. The focus seems to be on the possible impact on growth rather than on inflation. If geopolitical risks subside and downside risks to growth ease further, we expect a majority of board members to support another hike. The BoJ is likely to focus less on headline inflation and more on its new price measure. It features core inflation, while stripping out distortions from government measures. As such, it should better capture underlying inflation. The BoJ’s preferred inflation measure should stay well above 2% amid firm wage growth, second-round effects from oil price hikes, and a weak JPY.