MNI BOJ WATCH: Board To Discuss Hike, Shift Outlook
MNI (TOKYO) - The Bank of Japan Board will consider raising the policy rate 25 basis points to 0.5% on Friday should finance markets remain stable following President-elect Donald Trump’s inauguration on Monday.
Bank officials largely doubt a move higher will negatively impact the economy, as a 0.5% rate will still represent an accommodative level judging by real interest rates. Wage hike momentum at smaller firms driven by the tight labour market has also encouraged BOJ officials, despite some reservations over their size and scale.
While the board has held the policy rate steady since July, Governor Kazuo Ueda signalled the potential for a January hike at December's board meeting. (See MNI BOJ WATCH: Ueda Keeps Jan Hike Alive, Notes Risks) The market has priced in an 88% chance of a 25bp move higher and a 0.7% rate by December.
MNI reported last week the board was open to a January hike should financial market's remain stable. (See MNI POLICY: BOJ Board To Discuss Jan Hike, Hold Possible)
FOCUS SHIFT
The BOJ’s focus will likely shift to the inflation outlook and the possibility that the Bank could accelerate its hiking pace up from once every six months.
While the BOJ expects the y/y growth in CPI to slow in or after the middle of the year after holding at a relatively high level, stronger than expected inflation will prompt the Bank to consider accelerating the pace of hikes towards 0.75%.
Continuous wage hikes are making it easier for businesses to transfer high costs to retail prices, despite the risk of lower sales. The tight labour market will continue to strengthen the relationship between wages and prices, however, bank officials see little risk of an uncontrolled spiral developing. Bank officials are focused on corporate price revisions in April and May, the beginning of the new fiscal year, and whether consumers accept higher prices to examine the strength of the wage-price virtuous cycle.
Bank officials are also focused on whether medium- to long-term inflation expectations, which are hovering around 1.5%, will move toward the bank’s 2% price target. Lower expectations will lead the bank to hike slower.
The BOJ will also watch services prices, which have underperformed despite rising steadily, to gauge wage-price pressure. While goods prices have on average risen about 4-5%, they have begun to weaken, meaning services will need to strengthen closer to 3% – from a 1.5% average – for the bank to meet its 2% target and inflation to maintain momentum.