MNI INSIGHT: BOJ Unmoved by Rising Inflation, Slumping Yen

The Bank of Japan will not relent on its ultra-easy policy settings and yield curve control despite a looming pick-up in inflation and a slide in the yen to its lowest level against the U.S. dollar since 1998, when Japan last intervened to support the currency.

MNI understands BOJ officials believe inflation may be rising faster than predicted despite recent retail price hikes and their pass-through being largely in line with forecasts made in July (See: MNI INSIGHT: Inflation Over 3% Not Enough For BOJ).

Compounding concerns is the slide in the yen to around 144 against the U.S. dollar, with the weaker currency set to stoke inflation pressures after a lag by raising prices for commodities and durable goods.

Despite the inflationary impact of a weak yen, it will not prompt a shift in the Bank’s easy policy even as market chatter of currency intervention grows.

The BOJ maintains the view that it is undesirable for the Bank to raise rates to deal with yen weakness. BOJ Governor Haruhiko Kuroda said in July that although a rate rise may temporarily curb downward pressure on the currency, it would not stop prolonged weakness.

INFLATION FOCUS

BOJ economists are focused on the October Tokyo CPI due on Oct. 28 and corporate price expectations in the September Tankan survey due on Oct 3 to get a better gauge of inflation. That task is complicated as falling energy prices are offsetting higher durable goods and food prices.

The board’s median inflation forecast for this fiscal year was revised up to 2.3% in July from 1.9% in April based on rising input prices and their pass-through in the June Tankan survey, as well as upcoming retail price hikes.

The policymakers will maintain July’s CPI forecast at the Sept 21-22 policy-decision meeting, while they will review the medium-term economic growth and price outlook at the Oct 27-28 meeting.

The Bank’s focus on achieving its 2% price stability target in a “sustainable and stable manner” means it has ignored the rise in consumer prices above this level as it seeks to cement hard won-gains against years of deflation. Japan’s core consumer prices rose 2.4% in the July.

Officials are now worried about the impact of higher prices on private consumption, especially low-income households as real incomes decline due to weak nominal wage rises. While they don’t expect private consumption to slow sharply given the ongoing recovery from Covid lows, they warned high-frequency data showed the rate of growth in spending is slowing (See MNI Brief: Japan July Wages Rise; Real Pay Stays Negative).

While the BOJ judges that it takes more than one year for Federal Reserve rate hikes to affect the real U.S. economy, bank economists are also cautious about the outlook for exports and production in the fourth quarter as they await further evidence of slowing overseas demand.