Under the test of stagflation, the central banks of the US and Japan find it difficult to "turn dovish."

Under the pressure of stagflation, even if the economy and stock market weaken, it may be difficult for the central banks of the U.S. and Japan to relax monetary policy.

On April 1st, the team of Nomura analyst Tomoaki Shishido stated in a research report that, given the stagflation risks faced by Japan and the U.S., the Federal Reserve is expected to remain reluctant to cut interest rates, while the Bank of Japan will stick to its plan to continue raising rates.

The U.S. core Personal Consumption Expenditures (PCE) price index for March exceeded expectations, intensifying market concerns about stagflation in the U.S. Nomura believes that although U.S. stocks have recently corrected due to tariff concerns, this is more like a short-term adjustment and will not lead to a significant economic slowdown.

For Japan, despite the weak economy and poor stock market performance, considering domestic inflationary pressures, Nomura believes that the Bank of Japan may still maintain its stance on raising interest rates. The probability of a rate hike in May is low, while the June meeting may be "truly active."

U.S.: Stagflation concerns resurface, but recession risk is not yet apparent

Since the Trump administration announced tariff policies, concerns about economic slowdown have resurfaced in the U.S. stock market, leading to the VIX panic index rising for three consecutive days since the 25th, with low beta factors and defensive sectors performing well.

Meanwhile, the U.S. core PCE price index released on March 28 rose 0.4% month-on-month, exceeding market expectations, and the Michigan Consumer Sentiment Index (revised data) showed long-term (5-10 years) inflation expectations at 4.1%, higher than preliminary data, reaching the highest level since 1992. These data confirm market concerns about stagflation in the U.S.

However, Nomura believes that there are currently no signs of tightening financial conditions in the U.S., indicating that there will not be a sharp economic slowdown. The recent decline in stock prices may just be a short-term adjustment, expected to end within a month or two, similar to the situation in August 2024.

Japan: May rate hike may be premature, but June meeting will be the "real active period"

In Japan, the core and super core CPI in Tokyo exceeded market predictions by 0.2 and 0.3 percentage points respectively in early and mid-March, with significant price increases in low-volatility categories such as services. The April CPI data will reflect a large number of price adjustments at the beginning of the new fiscal year, and it is expected that prices of goods and services may rise significantly.

Nomura Securities believes that unless President Trump cancels or postpones most of the tariff policies, a rate hike at the May Monetary Policy Meeting (MPM) would be premature for the Bank of Japan.

Bank of Japan Governor Kazuo Ueda stated at a press conference following the March 19 MPM that if the details of the U.S. tariff policy become somewhat clear, and financial markets and corporate and household sentiment stabilize, the central bank may raise rates at the MPM on April 30 to May 1.

However, Nomura pointed out that given the stock market's reaction after Trump announced new auto tariffs, it is expected that stock market volatility will be very high in the coming weeks. As of the morning of March 31, the overnight index swap (OIS) market reflected only slightly over a 20% probability of a rate hike at the May MPM. If the Trump administration announces large-scale tariffs on April 2, this probability may drop below 10% by the end of April

Nomura expects the Bank of Japan to continue leaning towards interest rate hikes, even amid a weak economy and stock market. The MPM meeting in June could be "truly active." Due to rising prices potentially causing the ruling party to lose seats in the July Japanese Senate elections, the political instability risk around the July MPM is very high. Nomura believes that the upcoming Senate elections are unlikely to delay the timing of interest rate hikes and may even advance it. Nomura continues to predict an interest rate hike at the July MPM, while also considering the possibility of a hike in June to be quite high