2022 outlook - How will Japan’s path differ?

2022 outlook - How will Japan’s path differ?  

• JPY: Japan’s economic and policy cycles are likely to differ from those in other developed countries - GDP growth looks set to be stronger in 2022 than in 2021, driven by consumer spending and productivity-enhancing business investment, while higher inflation is unlikely to be a problem for the BoJ. Rather, consistently low inflation will likely remain a bugbear, which suggests BoJ monetary policy is highly unlikely to change in 2022. While the growth outlook could shift markedly depending on how the Omicron variant situation unfolds, Citi analysts’ base-case for 2022 is predicated on quite an accommodative financial setting.​ 

• JPY: Japanese inflation to remain very low by global standard - globally, a sharp rise in inflation and a resultant change in monetary policy stance are the key themes for the financial markets in 2022. But that should not be the case with Japan. Citi analysts currently judge that the underlying inflation trend, adjusted for various special and one-off factors, is +0.5% or slightly above. Most importantly, companies generally remain hesitant to hike prices when consumer inflation expectations remain subdued. Going forward, the team estimates that the 10% depreciation of the yen against USD pushes up the core CPI by 0.5 to 0.6%, while a $10/bbl rise in oil prices pushes up the core CPI by 0.3%. Citi analysts therefore think yen depreciation and higher energy prices in October and early November could lift the core CPI by around 0.5% in total and the team expects Japan’s core inflation to reach 1.1% in April 2022 but fall again from mid-2022 with the positive impact from energy expected to taper off. At 2022 end, core inflation will likely be somewhat below the 1% mark.  

• JPY: BoJ highly likely to stand pat through 2022 – in this environment, the BoJ looks highly unlikely to change monetary policy in 2022. Citi analysts expect BoJ to maintain both the negative interest rates policy and yield curve control through 2022 (and until Governor Kuroda’s term ends in April 2023). Supply constraints, the earlier rise in energy prices, and the reopening of the economy have exerted a much stronger impact on inflation in Europe and the US than in Japan and will probably continue to do so going forward. An intensifying contrast in monetary policy between Japan and other countries, in particular, widening Japan-US long-term interest rates differentials, could send the yen weaker again against the dollar in 2022 once the impact of Omicron fades.  

• JPY: Governor Kuroda will leave the BoJ in April 2023 after a 10-year tenure. Assuming PM Kishida stays in power beyond the Upper House elections (which is Citi’s base case), he is likely to appoint someone more in line with the BoJ’s tradition to the governor position and policy normalization including ending negative interest rate policy and yield curve control. However, this is more likely to be a 2024 than a 2023 event.             

Data released Friday 

• USD: US payrolls in the establishment survey are up 210k in November, weaker than consensus for 550K. Seasonal adjustment appears to be a major factor – NSA jobs are up 778k. In the separate household survey, the unemployment rate falls unexpectedly and rapidly from 4.6% to 4.2% even as the participation rate rises to 61.8% from 61.6%. Meanwhile, average hourly earnings are up 0.26%MoM and 4.80%YoY. The seemingly divergent data from the two surveys are telling the same story with demand for workers continuing to outstrip supply. Citi analysts expect the jobs report likely keeps Fed on-track to accelerate tapering of asset purchases at the December 15th FOMC meeting and for the Fed to commence rate hikes in June – or earlier.   

• USD: US November ISM services index rises to 69.1 in November from 66.7 in October, stronger than consensus for 65.0. The increase is led by the business activity index while the employment index also rises materially from last month. Meanwhile, the supplier delivery times index stays flat though at near-record high, indicative of further worsening of supply chains and the price index is also little changed at the very elevated levels.  

• CAD: Canada’s jobs rise by 153.7k in November, much stronger than consensus for a 37.5k rise. Unemployment rate falls to 6.0%, just 0.3pp above the pre-pandemic unemployment rate of 5.7%. While the strong gains in employment imply labor shortages are not necessarily constraining hiring, the substantial drop in unemployment suggests a much tighter labor market by early 2022 that could see BoC raising rates by April at the latest. 

Week Ahead   

• USD: US November CPI MoM – Citi: 0.9%, median: 0.7%, prior: 0.9%; CPI YoY – Citi: 6.9%, median: 6.7%, prior: 6.2%; CPI ex Food, Energy MoM – Citi: 0.7%, median: 0.5%, prior: 0.6%; CPI ex Food, Energy YoY – Citi: 5.1%, median: 4.9%, prior: 4.6% - Citi analysts again expect a strong increase in prices in November with services prices likely to pick up broadly over the course of the next ~6 months that would reflect elevated inflation expectations and a persistently tight labor market putting upward pressure on wages. 

• USD: University of Michigan Sentiment – Citi: 66.9, medina: 68.0, prior: 67.4; 1Yr Inflation Expectations – Citi: 4.9%, prior: 4.9% - Citi analysts expect the University of Michigan’s consumer sentiment indicator to fall modestly to reflect renewed Omicron concerns. Meanwhile, 1Yr-ahead inflation expectations are expected to be unchanged while the more important 5- to 10Yr expectations are likely to move closer to 3.5% over coming months - a signal of the increasingly embedded high inflation likely to prompt more hawkish Fed policy. 

• EUR: ECB meeting – the ECB meeting on 16 December takes place in the context of high uncertainty and deep divisions within the Council. Citi analysts expect the ECB to terminate PEPP on schedule in March 2022 and commit to net asset purchases post-PEPP only to December 2022.

• AUD: RBA Board Meeting: Citi cash rate forecast: no change, Previous: no change – Citi analysts do not expect RBA to make any policy shifts in its final meeting of 2021. This means the cash rate will remain at 0.1%, and the Board will persist with purchasing $AU4bn worth of bonds per week, until its next review in February 2022.

• CAD: BoC Rate Decision – Citi: 0.25%, median: 0.25%, prior: 0.25% - Citi analysts expect the BoC to leave rates unchanged at 0.25% although will be watching for signs that the Governing Council could be considering a rate increase even earlier than the latest guidance for the “middle quarters of 2022”. 

This is an extract from the Daily Currency Update, dated December 6, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here - 

 https://asia.citi.com/wealthinsights/citifx-house-views-and-strategy