MNI BOJ WATCH:Upside Inflation Risks Build Before New Forecast

The Bank of Japan may express concern about rising upside risks to inflation at its meeting later this week but it is likely to keep its policy settings on hold, as it continues to monitor data ahead of revised forecasts due the following month.

The BOJ could modify the wording of its assessment of inflation to reflect a higher-than-previously-anticipated pass-through of higher costs by companies to consumers. The BOJ’s current median price view announced in April is for 1.8% inflation this fiscal year, with core prices dipping below 2% towards the middle of the period.

While Bank officials expect upward pressure on CPI from import prices to cede, food prices are continuing to rise. Prices of 3,575 food and daily necessities and of 3,485 will be raised in June and July, respectively, according to the Teikoku Databank, though smaller firms are lagging bigger companies in passing on higher costs.

PRIVATE CONSUMPTION KEY

The strength of private consumption is key to enabling businesses to raise retail prices, and officials have taken note of data indicating that consumers are choosing cheaper goods as living costs rise. Average propensity to consume stood at 61.6% m/m in April, the lowest in 20 months.

The BOJ is particularly focused on the extent to which higher costs are being passed on in the services industry, where wages are a larger component of total costs.

If, in July, the BOJ revises its baseline forecast higher, then officials could recommend an adjustment to yield curve control settings at that month’s meeting, though they are uncertain whether Governor Kazuo Ueda would heed such advice. (See MNI POLICY: BOJ Officials Mull Recommending July YCC Tweak)

The July 27-28 meeting will follow national inflation data on July 21 and the July 25-26 meeting by the Federal Reserve, whose policy will be an important factor for any BOJ moves in coming months.

Ueda has stressed that he regards any premature policy adjustment as riskier than maintaining ultra-easy settings for too long.