MNI BOJ WATCH: Board To Hold, Focus On Upside Price Risks
MNI (TOKYO) - The Bank of Japan will likely keep its policy interest rate unchanged at 0.50% at the two-day meeting ending on March 19 amid uncertainties over U.S. policies and their impact on the global economy, and financial markets.
However, policymakers will remain mindful of the upside risks to prices as steady wage hikes drive inflation, particularly as the Bank prepares to update its medium-term forecasts at the April meeting.
Board members will focus on U.S. tariffs due to take affect April 2 and their impact on financial markets – especially stock prices – to gauge the downside risk to the U.S. economy, while bank officials will pay close attention to whether weaker confidence data will lead to actual softer capital investment and private consumption, in the absence of harder economic metrics that could illustrate an economic downturn.
The Board hiked the policy rate 25 basis points at the last meeting in January, following up from July 2024's increase. The market has not fully priced in an additional hike until October, however, the Bank will consider increasing rates at a pace of every six months, particularly if it revises its internal view of underlying inflation, which it currently sees at 1.5%. (See MNI POLICY: Faster BOJ Hikes Hinge On Underlying View)
Japan's core-core CPI rose 2.5% y/y in January, accelerating from December’s 2.4%, holding above the Bank’s target for the last 28 months.
DOMESTIC CONCERNS
Japan’s largest trade confederation Rengo reported that this year’s shunto labour-management negotiations had yielded a weighted average wage-hike demanded of 6.09%, up from last year’s 5.85%, the highest level since 1993 and largely within the BOJ’s view. (See MNI POLICY: BOJ Sees Steady Wage Hikes Despite Tariff Concerns)
The bank’s January hike was predicated on the assumption that wages would increase in a similar fashion to 2024 amid the structural labour shortage.
Bank officials are focused on inflation accompanied by wage hikes in or after April when businesses are set to revise their retail prices.
While the BOJ’s Consumption Activity Index showed weaker private consumption, bank officials believe spending is steady as a trend, as the government data used to craft the index is unreliable. They expect private consumption to rise at an annualised pace of 0.5%, or 0.1% q/q, due to Japan’s rough 0.5% potential growth rate, although income conditions remain favourable.
However, officials will monitor whether worsening consumer sentiment amid high prices and corporate sentiment due to uncertainty will lead to an actual fall in consumer spending and capital investment. They are also focused on the second-round effect of high rice prices on processed foods, which accounts for 15% of the total CPI.
The BOJ is worried that recent high prices, particularly on daily necessities, will boost medium- to long-term household inflation expectations more than previously noted.