MNI BOJ WATCH: BOJ To Maintain Easy Policy, Forward Guidance

The Bank of Japan board is expected to maintain yield curve control and dovish forward guidance for its policy rate as officials see the ongoing need to support economic activity even as the yen hovers at a 32-year low, MNI understands.

Policymakers will review their medium-term economic growth and inflation rate forecasts out to fiscal 2024 at the policy meeting on October 27-28. The median forecast for the year-on-year rise in the core consumer price index this fiscal year will be revised up from 2.3% to above 2.5% as companies pass on higher costs and the yen weakens. (See MNI POLICY: BOJ To Lift FY22 CPI Forecast; Trim Growth View)

Japan's core CPI rose at a 3% y/y pace in September and will likely rise further over the short term given the time lag between a weaker yen and when it starts affecting food and durable goods prices, as well as other prices.

The BOJ will not use monetary policy to support the yen, even as the weak currency pushes up import prices - and inflation - and squeezes household spending. The Japanese government intervened to support the currency on Friday after it traded just shy of JPY152.

The policy rate will be kept at -0.1% and the BOJ's yield curve control policy will continue to target a 10-year yield of between -0.25% and 0.25%. (See MNI BRIEF: BOJ's Kuroda Says Keeping Easy Policy Appropriate)

BOJ officials view the upside risk to inflation as small, but they are focused on how corporate price-setting and the economy evolves from January as they seek to avoid making the same mistake as the Federal Reserve did in underestimating the threat of inflation.

If the BOJ gains confidence that inflation is edging higher, it may allow the bank to start considering a change in the outlook for monetary policy.

WAGES IN FOCUS

Bank officials judge that wage hikes next April hold the key for Japan to move towards achieving price rises in a sustainable and stable manner. (See MNI POLICY: BOJ Studies Inflation Risks; Wages in Focus)

They see growing pressure on major firms that have enjoyed higher profits from the weaker yen to implement reasonable wage hikes. However, smaller firms that have been hit by high costs are having difficulty in raising wages. (MNI INSIGHT: BOJ POLICY Waits On Small Firm Wage Hikes)

One-time wage hikes aren’t sufficient to change people inflation expectations but the impact of April's wage hikes on households will last for the fiscal year, somewhat easing the impact of high costs.

The Japanese Trade Union Confederation, known as Rengo, is seeking an increase of about 5%, which represents a rise of about 3% in base pay along with a seniority-linked bump of roughly 2%.

The BOJ and private economists are unsure that a price-wage spiral will develop as the rise in CPI was mainly due to cost-push factors and wage hikes were small.