MNI INSIGHT: BOJ Grows Concerned On Energy-Driven Price Surge

Consumer prices are climbing faster-than-expected in Japan since January data on surging energy costs linked to the Ukraine war, leading Bank of Japan officials to likely upgrade inflation forecasts ahead and focus on the chances for wage hikes as the vital factor for sustained inflation around the targeted 2% level, MNI understands.

The probability of a near-term 2% consumer price headline report around April has grown and the trend will get a hard look in the medium-term forecasts due that month that will likely raise the fiscal year inflation forecast from 1.1%, MNI understands. The BOJ board in January predicted the median inflation forecast when crude oil traded around USD80 per a barrel.

The BOJ's next meeting in March should also see a warning on the economy, see: MNI BRIEF: BOJ To Point To Growing Downside Risks.

Underscoring the rapid gains in energy costs, benchmark Brent prompt crude futures reached high of USD139.13 a barrel on Monday, up nearly 18% from the pre-weekend close.

The gains in imported energy costs may prompt companies to accelerate price hikes. In Japan, businesses tend to raise their retail prices every April while monitoring consumers’ reaction and the real purchasing power of households.

The government has already reacted, with the subsidy for petrol prices lifted to JPY25.00 from JPY5.00. But the price gains in the consumer basket are continuing and for the BOJ, the inflation outlook is only sustainable if wages rise as well in a stable manner.

BOJ officials are concerned however that companies, especially major manufacturers, may refrain from raising wages by citing the high uncertainties caused by the growing geopolitical risks from Moscow's invasion of Ukraine.

The March Tankan business sentiment survey due out on April will also provide a sharper view on how companies are looking at price-setting nd inflation expectations.