MNI INSIGHT: BOJ To Upgrade Inflation View; Check Risk Balance

The Bank of Japan board’s median forecast for inflation in fiscal 2022 could be upgraded above 1% from +0.9% in October in the wake of firmer corporate price-setting behaviour, MNI understands.

The board is also expected to judge at the Jan. 17-18 policy-setting meeting that the near-term downside risk to prices is becoming less than three months ago. Some board members may cite the near-term upside risk from crude oil prices that were not incorporated in the previous Outlook Report.

The December Tankan showed that businesses are more positive in raising retail prices because of higher raw material prices, see: MNI INSIGHT: Favourable BOJ Tankan Results, With Reservations.

INFLATION PRESSURES NOTED

Despite brighter price views, the BOJ will keep monetary policy unchanged this month as the achievement of a sustained 2% rise in prices remains elusive. But the BOJ is expected to discuss review the downside risks for prices.

The BOJ also notes signs that the underlying trend of prices and the output gap are both improving, increasing upward pressure on prices, though whether that flows through in actual consumer prices for the medium- to long-term remains a question.

In 2008, 2014 and 2018, Japan’s core CPI rose above 2%, above 3% and to 1%, respectively but the medium- to long-term inflation expectations did not rise.

The BOJ has insisted the mechanism of adaptive inflation expectations is important in viewing price trends, but it is complex and strongly influenced by social “norms”.