MNI BOJ WATCH: Board To Consider Hold; Wages, Services In Focus

The Bank of Japan will likely maintain its easy policy, including negative interest rates and yield curve control, at the Jan 22-23 meeting, despite strong wage hike reports from branch managers, as the economy fails to show signs of meeting the Bank’s 2% inflation target.

Strong wages at some firms amid persistent labour shortages have encouraged policymakers and reinforced conditions that may drive a policy exit as early as March. However, some board members remain skeptical over whether smaller-firm wage hikes will meet expectations and they will want more time to examine data. Bank officials believe the BOJ has time to review developments before any end to easy policy settings as it has not fallen “behind the curve.”

Following the board's December meeting, Governor Kazuo Ueda noted the BOJ must ascertain "with high accuracy" the nature of wage hikes to achieve the bank’s 2% target in a stable and sustainable manner. (See MNI BOJ WATCH: Ueda Gives No Signal For January Policy Exit)

Sources familiar with the matter have told MNI the governor will need hard evidence, such as government data or wage-hike surveys, before any exit of easy policy. MNI has reported the bank could move in April should wage data show strong momentum (See MNI POLICY: BOJ Mulls Framework Post Likely April Rate Liftoff)

Bank officials have shifted attention to whether the second force of inflationary pressure – or the relationship between wages and prices, and how they increase following economic improvement – will strengthen after the first cost-push force weakens. They will also monitor if high personnel expenses will drive services to rise in April when firms broadly revise their prices, a key element needed to strengthen the second force.

Services prices rose 2.3% y/y in November, accelerating from October’s 2.1% – the highest level since October 1993 when it rose 2.4%. The print illustrated how firms have raised labour expenses in line with elevated raw material costs. However, goods prices are falling as the pass-through of higher import prices to consumers weakens, making it difficult for firms to raise wages or personnel expenses.

SOLID CORE-CORE CPI

The BOJ board will likely keep its underlying price view measured by the core-core consumer price index in fiscal 2025 at October's 1.9% forecast on the premise that wage hikes accelerate.

While bank officials see no fresh factors to prompt a FY2025 core-core inflation revision, the board may slightly lower its FY2024 view due to a drop in crude oil prices. Officials expect the y/y change of core-core CPI in FY2024 to fall below 2% by about September. Their focus will then shift to whether the y/y change will accelerate again afterward.