Synopsis:

Morgan Stanley notes that their baseline forecast for a January BoJ rate hike is at risk of being pulled forward, possibly to December, due to shifting market expectations and improving domestic demand in Japan.

Key Points:

• Catalyst for Volatility:

  • Shifting expectations around central bank actions, particularly the BoJ, have driven recent market volatility.

• BoJ Hike Timing:

  • Initially, Morgan Stanley expected the BoJ to hike rates in January 2025, but this timing was questioned after the July BoJ press conference. Comments from BoJ Deputy Governor Uchida suggested the central bank would avoid hiking during periods of excessive volatility, reinforcing the January expectation.

• Inflation Forecast Anchors:

  • Morgan Stanley's January hike prediction is tied to their inflation forecast and the expectation of a year-end USD/JPY rate around 146, although risks now lean towards an earlier move, potentially in December 2024.

• Supportive Domestic Demand:

  • Recent GDP data indicate that domestic demand in Japan is improving, supporting continuous nominal growth, which could prompt an earlier BoJ rate hike.

Conclusion:

While Morgan Stanley's baseline remains a January 2025 BoJ rate hike, risks are skewed towards an earlier move, potentially in December, especially if Japan’s domestic demand continues to improve and inflation pressures persist.