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TOKYO (MNI)

Japanese companies are more likely to pass along higher costs to the retail level, but the willingness of households to pay more without significant wage gains remains the crux of any Bank of Japan decision to tweak the easy policy outlook as inflation looks set to reach near 2% in or after April and remain around that level at least in the medium term, MNI understands.

The BOJ's March Tankan brought clarity on corporate views on cost-push higher imported energy costs, with firms raising inflation views and suggesting it was time for higher prices down the line as the cost impact will be sustained.

But the BOJ is still uncertain that higher retail prices will be accepted by households and that wages will be raised sufficiently to ease any drop in real purchasing power.

WHAT'S NEXT?

BOJ officials however see the possibility of a second-round retail effect of high input prices increasing pressure to consider other steps, and drawing government concerns on how that may dampen the economic recovery if consumer pocketbooks are pinched hard, see: MNI INSIGHT: BOJ Policy Could Pivot With Changing Price Views.

For now, however, the BOJ has made it clear that keeping its yield curve control policy for the 10-year Japanese Government Bond (JGB) in a range of -0.25% to +0.25% is the best way to reaffirm an easy policy stance in the face of potential faster than expected rate hikes from the U.S. Fed.

Other discussions center on widening the yield band, which the BOJ suggests would be taken as a tightening signal by the market, with yields in Japan as well as the yen already reflecting that pressure. Another option discussed is to target shorter-date JGB tenors to influence the five-year yield curve to have more impact on near-term policy.

BREAKING DOWN THE TANKAN

In the Tankan released on Friday, both short- and medium-term inflation expectations at Japanese firms rose as expected while sentiment dropped on higher energy costs and a weaker yen.

On average, corporate annual consumer inflation rate rose to a record high of 1.8% in March, up from 1.1% in December. Companies also saw a 1.6% inflation rate three and five years ahead, compared with +1.3% and +1.4%, respectively in the December survey.

BOJ officials continue to pay attention to capital investment plans, now above the historical average this fiscal year started April 1, in the coming months amid geopolitical and economic uncertainties on whether a virtuous cycle from profits to spending can continue. The upcoming June Tankan survey is seen as a more reliable indicator on company capex plans.

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