Rate hike prospects supported by solid sentiment – ING

Finance

Rate hike prospects supported by solid sentiment – ING

ING economist Min Joo Kang notes that Japanese business sentiment remains relatively firm, with the Tankan Survey and Manufacturing PMI both in expansionary territory. Despite cautious outlook components and sectoral divergences, the Bank of Japan (BoJ) is seen placing greater emphasis on inflation dynamics. ING therefore expects an April 25 bp rate hike, viewing underlying inflation as approaching the 2% target.

Solid Tankan and PMI back April hike

“Japan‘s Tankan Survey showed that business sentiment remains relatively firm despite higher oil prices and supply constraints. The manufacturing purchasing managers’ index stayed above 50. With the Bank of Japan likely placing greater emphasis on inflation, we expect an April interest rate hike.”

“The Manufacturing PMI delivered a similar story. It was revised up to 51.6 from its flash 51.4, even though this is below Februarys 53. It has remained in expansion for three consecutive months.”

“Todays Tankan showed that the recent rise in oil prices may raise inflationary pressure in the future. The output price index indicates higher prices are expected in both the short and medium terms. The Bank of Japan will pay more attention to the price component.”

“This is in line with the BoJs view that underlying inflation is approaching 2%, supporting further policy normalisation. We expect the BoJ to deliver a 25 bp hike in April.”