MNI BOJ WATCH: Board To Consider Hold, Higher CPI View

The Bank of Japan board will likely hold steady when it delivers its next policy decision, but note increased risk of stronger inflation rates driven by a more robust wage-price virtuous cycle due to better-than-expected wage hikes at major firms.

BOJ officials are still monitoring the impact on economic activity and prices alongside development of underlying inflation, following the board's decision to end negative rates and scrap yield curve control at March's meeting. (See MNI BOJ WATCH: Ueda Says Rate Path Will Depend On Prices)

The weak yen, which has soften 4% against the greenback and was trading at JPY154.664 Monday, will also renew cost push and increase upward pressure on prices, however, bank officials see some downside price risk as uncertainty over the degree of wage hikes at smaller firms and how it filters through to prices exists. (See MNI POLICY: BOJ Sees Risk of Earlier Inflation Rebound)

The board will meet over Thursday and Friday.

HIKE TIMING

Real wage hikes at smaller firms and October price revisions should drive policymaker confidence that the economy can achieve the bank’s 2% price target, which will lead the board to consider strongly a further policy rate hike at the October 30-31 meeting.

The BOJ will also want to see corporate price revisions expected in October after it confirms wages gains sometime after July.

However, the next hike could occur as early as July should bank officials confirm wage hikes at smaller companies through the branch managers’ meeting and other information sources.

KEY MESSAGES

BOJ Governor Kazuo Ueda may offer hawkish remarks to slow the pace of yen weakness, or voice concern over higher prices due to the forex moves.

MNI reported this month the BOJ is monitoring the impact of the yen on household living costs and consumption. The year-on-year rise of Japan's annual core CPI decelerated to 2.6% in March from February’s 2.8%, showing weaker pass-through of cost increases, data released by the Ministry of Internal Affairs and Communications showed on Friday.

The BOJ board will likely revise up its core-core inflation projection this fiscal year above 2% from January’s 1.9% as wage hikes at major firms accelerated more than bank officials expected. The board will also revise its median inflation forecast for fiscal 2025 to about 2% from January’s 1.9%, and set its first 2026 forecast at about the same level.

While bank officials feel assured about wage hikes at smaller firms, they are not confident of their degree. The BOJ regards October price revisions, especially services prices, as the key indicator of measuring the strength of the relationship between wages and prices.

Wages at smaller firms will accelerated toward summer and bank officials will focus on how the rise in labour costs filters through to services prices as many non-manufacturers are willing to raise prices. Modest wage hikes at smaller firms will undermine hope for solid services prices and the strength of the wage-price virtuous cycle.