MNI POLICY: BOJ Concern Grows Over Yen Impact On Wages, Prices

Bank of Japan officials are watching the impact of the soft yen on household living costs and consumption and whether it weakens the relationship between wages and inflation, making it harder for corporate retailers to raise prices, MNI understands.

Officials expect the so called secondary force to strengthen on the back of the economic recovery, offsetting the waning impact of higher import prices – the first force. However, the weak yen will increase food and energy prices, which could negatively impact consumption, stall the economic recovery and impede longer-term price rises, putting the BOJ's sustainable 2% price target achievement in jeopardy.

The yen traded at JPY154.319 against the U.S. dollar Tuesday, down from the JPY151 level noted at the start of the month. BOJ Governor Kazuo Ueda recently told lawmakers the Bank would consider monetary policy change should the risk of the underlying inflation rate rising above 2% increase due to higher import prices driven by the weak yen, but fx moves alone would not lead to adjustment.

WAGES KEY

Bank officials do not expect private consumption, supported by wage-hike hopes and the government’s one-time tax cut of JPY40,000 per person, to derail from a recovery path immediately.

Private economists expect the real wage decline to slow toward summer and turn positive once hefty wage hikes filter through to salaries.

However, real wages will take time to catch up with CPI, despite the year-on-year drop narrowing and nominal wages increasing in or after April, as the upcoming end of the government's utility subsidies will boost the inflation rate.

Japanese real wages fell 1.3% y/y in February for the 23rd straight month, matching the record for the longest period. Japan’s core consumer price index, meanwhile, rose 2.8% y/y in February. While the rise will likely slow over the coming months, the BOJ expects core CPI to accelerate again later in the year.

Price revisions due around October will likely drive further monetary policy action, MNI reported this month. (See MNI POLICY: Oct Price Revisions Key To Further Rate Hikes)