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BOJ Rate Hike Timing Projections Revisved

On Tuesday an extension to the current Diet session was agreed upon in principle, and that was cemented today. Because the extension will be for 12 days, the Upper House election has been pushed back a week, from July 22 to July 29. This means the official campaign period for the election will begin on July 12.

The Bank of Japan’s July Monthly Policy Meeting concludes on that same day, which pretty much rules out the chance for a rate hike in July. I’m lowering my projection from 30% to 5% in July and raising my August projection from 50% to 60% - in other words, I’m off the fence.

Morgan Stanley’s Takehiro Sato rightfully places much emphasis on the BOJ’s June Tankan survey in determining whether a rate hike will come in August, writing, “The June Tankan Survey should be an important milestone of whether the BoJ continues its aggressive normalization campaign” at the Morgan Stanley Global Economic Forum.

Back in March I thought it could have turned into an aggressive campaign, but now I think I would have worded the above sentence as, “The June Tankan Survey should be an important milestone of whether the BOJ resumes its interrupted desire to embark upon an aggressive normalization campaign.”

Splitting hairs over words aside, I’m thinking anything over 2% annualized GDP growth in the second quarter of 2007 will seal the deal. The Tankan will no doubt be important, and given that the most recent monthly Reuters Tankan was decidedly mixed - with sentiment amongst manufacturers at a five-month high in June and sentiment in services at a 15 month low - the BOJ’s upcoming quartery Tankan is tough to call.

Sato is cautiously bullish on the upcoming Tankan, writing:

The manufacturing environment is not particularly healthy, with declining automobile exports and high inventories for IT products, but a firm headline result is likely to bolster investor confidence in the sustainability of economic growth. We currently think this could happen.

So do I. The main issue is whether the lack of increase in the CPI may get in the way or if the low sentiment in the service sector indicates that household spending may be slowing. Either could provide a stumbling block, and to raise rates in such a climate, the BOJ would have to explain itself very, very clearly to the outside world…

…and we know how skilled it is in doing that.

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