MNI BOJ WATCH: Board To Hold, Examine Economy, Price Risks

MNI (TOKYO) - The Bank of Japan board will consider leaving its policy interest unchanged at 0.25% when it hands down its decision on Friday, despite the belief among policymakers that the economy and prices are largely moving in line with projections.

Policymakers will continue to examine the impact of July's rate hike and volatile financial markets on economic activity and prices at the two-day policy-setting board meeting which begins Thursday. 

The upside risk to prices driven by high import costs – a key concern for policymakers in July – has fallen due to the yen's appreciation, allowing the Bank more time to watch price moves without the need to raise the policy rate for now. Bank officials want to examine the September Tankan survey on Oct. 1 and the quarterly branch managers’ meeting on Oct. 7 to gauge the impact of volatile financial markets on corporate capital investment and consumer spending before they consider further hikes.

BOJ overnight index swaps markets have given about a 16% chance of a hike at the October and December meetings and expect the board to hold this Friday. 

Policymakers are considering the Bank's future hiking path and will aim to push the rate to the lower bound of its 1%-2.5% nominal neutral-rate range with 25 basis point quarterly moves should fundamentals hold firm. (See MNI POLICY: BOJ Examines Upping Pace Of Hikes)  

OCTOBER DATA 

Bank officials are also paying attention to the October price revisions, particularly on services, to examine the strength of the wage-price virtuous cycle and the potential for further income growth in fiscal 2025.

How executives at major firms reveal their wage-hike stance in fiscal 2025, made available toward the end of this year, will form a key focus as the yen's strength squeezes exporters’ profits, making raises more difficult. The labour shortage, however, could continue to pressure wages higher despite the sluggish corporate profits.

Unless the U.S. slows faster than expected, major firms should reveal their intent to increase wages, which will also add pressure on smaller companies to follow.

Bank officials will also watch how financial markets and the yen react to the Federal Reserve’s likely rate cut this week. Greater yen strength will further eat into exporters’ profits and increase downward pressure on inflation.

WAGES EXPECTATIONS

Real and nominal wages should improve and boost private consumption, which will support corporate price hikes and help alleviate higher labour costs. (See MNI POLICY: BOJ Hikes To Weather Weaker Consumption)

Inflation-adjusted real wages, a barometer of households' purchasing power, remained positive in July for the second straight month, up 0.4%, despite falling from June's 1.1% growth. 

BOJ officials expect real wages to fall into negative territory in August as the boost from bonuses wane, before turning positive again in or after September as government subsidies lower consumer prices.