MNI INSIGHT: BOJ Likely To Up Price View, But Policy Unchanged

The Bank of Japan will likely raise its median inflation forecast above its policy target of 2% in its July outlook and board meeting but refrain from any policy changes until it sees evidence of wage gains of at least 3% next year as prices are seen as driven by volatile and temporary energy and commodity costs, MNI understands.

At the same time, the BOJ is expected to lower its estimate for growth this fiscal year started March even as recovery signs emerge from pandemic curbs earlier this year that has flowed through to higher retail and durable goods prices

For the current and next fiscal year, the BOJ is expected to forecast inflation above +2.0% and close to +1.5% respectively, from +1.9% and +1.1% previously. The median growth forecast this fiscal is expected to be revised down year from +2.9% as the economy has so far faced weaker exports and supply-chain disruptions caused by the earlier strict lockdowns in China.

However, the media economic growth forecast for next fiscal year is expected to be revised up from +1.9%.

PRICES, WAGES CONUNDRUM

BOJ officials are watching corporate cost pass-through trends from higher energy prices traced to cost-push inflation. The dynamic is likely to continue beyond fiscal 2022 and keeps the focus on whether higher prices will be accepted by consumers amid weak real wages, which fell 1.8% y/y in May for the second consecutive monthly dip.

Average wage hikes, including basic wages, stood at 2.07% this fiscal year, up from 1.78% last fiscal year, data released on Tuesday by the Japanese Trade Union Confederation showed. But BOJ officials have repeated that average wages need to rise at least 3.00% to keep the path of achieving the sustained 2% price target.

Still, BOJ officials maintain the view that private consumption remains on a recovery path, judging from May spending data, even as they monitor real purchasing power that is set to fall this year. A drop in purchasing power could force firms to absorb high costs that would lower profits, and bring caution on raising wages significantly next year.

BOJ MEETING, OUTLOOK

The BOJ holds its next policy meeting on July 20-21 and will also release its Quarterly Outlook Report. It is expected to make clear again that the inflation forecast will not meet the achievement of the 2% price target in a stable and sustainable manner, and hence not change easy policy, as it expects the pace of CPI to slow next fiscal year, (See: MNI INSIGHT: Exit From Negative Rates An Option For BOJ).

The BOJ could however use the July meeting to change its language on the impact of the Covid-19 pandemic, (See: MNI INSIGHT: Govt Pressures Add To Weak Yen As BOJ Eyes Change).

A persistently weaker yen is on the BOJ's radar as well, (See: MNI INSIGHT: BOJ Eyes Autumn Move If Yen Steadies, Prices Rise?)