MNI INSIGHT: BOJ Sees 2% Price Target Nearer With Wages Key

Bank of Japan officials see price gains reaching near 2% in the second quarter on higher energy costs and supply-chain disruptions with a fiscal stimulus kicking in and the output gap turning positive around mid-2022, and are looking at wages and costlier consumer goods to add more pressure, MNI understands.

The BOJ has made efforts to narrow the output gap, the difference between actual and potential economic performance, through its easy policy and special measures on corporate and services funding in tandem with the government efforts to spur wage gains, which have lagged.

A key test for sustained inflation will be wage negotiations this spring between major firms and workers that can set the tone for smaller companies afterwards.

DIVERGENCE WITH OTHER KEY ECONOMIES

However, with inflation up in key economies like the U.S., tweaks to BOJ policy to push harder to reach targeted 2% sustained inflation are in question.

Still, ongoing upward pressure on prices is expected to accelerate in or after April and core CPI is likely to rise to mid-1% or higher. That bring the BOJ tantalizingly close to a decades-long goal but getting over the hurdle has proved difficult as seen in 2008, 2014 and 2018 as wages lagged and companies did not raise retail prices quickly.

But differing from the past, BOJ officials see increasing favourable conditions for sustainable price rises, although wage hikes remain the most vital factor, see: MNI INSIGHT: BOJ To Upgrade Inflation View; Check Risk Balance.

The new government led by Prime Minister Fumio Kishida has pushed for businesses to raise wages through corporate tax cuts, which could also pave the way for higher retail prices.

ACCEPTING HIGHER PRICES

Households may accept higher prices, BOJ officials estimate, as the government has used cash distribution to spur the economy during the pandemic, though a major concern is the still anemic recovery among food and drink outlets and other face-to-face services.

That is reflected in short- and medium-term inflation expectations at Japanese firms, which in December rose to levels last seen in 2015. Official data too and the BOJ's outlook feeds into the case of accelerating inflation along with higher input costs linked to supply chain issues and a slightly weaker yen.

For example, major processed food companies are moving to raise prices and BOJ officials said that will lead to both retail outlets and suppliers also hiking prices.