The Bank of Japan may be mulling over following the suit of its peers and finally pick a course on raising rates. According to early rumors, this may happen before inflation hits its 2% target as the swift pace of its recovery could warrant an early policy action.

BoJ is not expected to make a rate hike this year, but long-lived status-quo of the Central Bank is much less certain next year. For the first three quarters of 2021, inflation was negative, but by the end of the year there was a clear shift – price growth not only became positive, but also began to accelerate rapidly:

Due to increased attention to the actions of other major central banks, the markets could potentially miss the moment when it becomes appropriate to price in a hawkish shift in the policy of the Bank of Japan. It is noteworthy that the statements of the Central Bank to maintain soft monetary policy until inflation reaches 2% refers specifically to the asset purchases (QE), and not to the interest rate. The Bank of Japan has never made a firm commitment to keep rates near zero until consumer price growth hits the target.

The Central Bank's latest quarterly survey showed that the surge in inflation also spurred inflationary expectations, so necessary to start the flywheel of the Japanese economy: the share of households expecting higher prices in a year rose from 68.2% to 78.8%. Expectations of higher prices should stimulate consumption, which in turn will increase company earnings, which will help to boost wages. However, the wage factor in stimulating inflation, unlike in other economies experiencing an increased rotation of the labor force, has traditionally worked poorly in Japan: even in the midst of a pandemic, the pace of layoffs was significantly lower than in other countries, so there was no reason for a surge in demand for labor, which is currently accelerating wages in other economies and which is one of the main factors of inflation now.

The determining factor for the policy of the Bank of Japan was and remains wage inflation. Price pressures due to higher import costs and supply disruptions may go away as quickly as they appear, but long-term inflation effects can only be expected if wage growth accelerates. What Japan is not very good at yet:

Wage growth failed to maintain positive growth trend by the end of 2021, however, if it starts to follow encouraging inflation developments, markets will probably begin to prepare for changes in the stance of the Central Bank. In the meantime, due to the divergence of the BoJ policy with its peers, which started in early 2021, Japanese investors continue ditching local assets and look for yields abroad, which keeps the yen under pressure:

Let's see if the Fed can slow down this trend to some extent today.