MNI BOJ WATCH: Inflation In Focus As Guidance To Be Maintained

Bank of Japan board members are focused on upcoming inflation data as consumer prices have risen faster than they forecast in October as companies pass through higher costs, with any revision to the inflation outlook key to a possible change to its easing bias in 2023, MNI understands.

Policymakers will maintain monetary policy settings, including the retention of an easing bias in forward guidance, at the December 19-20 meeting, although they acknowledge that downside risks to the economy remain large.

Bank economists assess that the economy, including exports and industrial production, continues to move in line with the BOJ's baseline scenario, with private consumption remaining solid despite weakening consumer sentiment. However, they are vigilant against the risk that slower global growth becomes more apparent in the first quarter, placing downward pressure on exports and production.

Bank officials will monitor the impact of high prices on consumer spending in the first quarter as additional retail price hikes are scheduled in or after February. Spending by low-income households has been judged as being considerably weak in the wake of high living costs, although spending data has broadly remained solid on the back of pent-up demand and accumulated savings. (MNI POLICY: BOJ Eyes 2023 CPI As Trigger For Policy Tweaks)

They are also paying attention to how rising Covid infections evolve and how they affect consumer spending at the end of this year and the beginning of the new year. Weaker spending will impede corporate price hikes and could increase pressure on firms to consider lowering retail prices, which in turn will make it difficult for firms to raise wages, BOJ officials warn.

The BOJ continues to monitor corporate inflation expectations in the hope that a perceived ability to increase prices will lead to higher wages, a key element in achieving its 2% price target is a stable and sustainable manner. (MNI POLICY: BOJ Policy Shift Needs Firm Tankan Inflation View)

Bank officials maintain the view that exports and production are expected to remain in an uptrend due to high orders of capital goods and low inventories of automobiles.

Despite slowdowns in overseas economies, which will put downward pressure on exports and production, bank officials expect the uptrend in exports and production to continue. The impact of slowing U.S. and Chinese economies on Japan’s exports and production will become more apparent in the first quarter and those effects are expected to continue.

Bank officials will not be able to determine the impact on exports and production at the December meeting as significant economic data to gauge the degree of the economic slowdown will not be available at that time.