MNI INSIGHT: BOJ Sees Near-Term Upside Risk To Inflation

The Bank of Japan thinks near-term upside price risks have increased since its January policy review due to rising energy costs, which are squeezing consumer spending and are likely to lead to weaker-than-expected exports and factory output in the first quarter, MNI understands.

Sustained higher energy costs could bring core inflation closer to the 2% level, though not in a sustained manner consistent with the aim of current easy policy, officials calculate. (see: MNI STATE OF PLAY: BOJ Kuroda Rules Out Early Tightening.)

While volatile energy costs are excluded from the underlying price trends the BOJ focuses on in its target for 2% sustained inflation, along with items like lower mobile phone charges and subsidies used to promote domestic tourism, (see: MNI INSIGHT: BOJ Sees 2% Price Target Nearer With Wages Key.) officials are monitoring the risk that they could flow through into grocery prices. This would affect both inflation and spending expectations.

So far CPI and corporate price hikes continue to be largely in line with the January forecasts, and the mix of energy-driven inflation and weaker activity is not expected to prompt policy changes at the next BOJ meeting.

OPTIONS

While market speculation has grown of a gradual shift in BOJ policy, former and current central bank officials have said that only tweaks are likely in an unspecified timeframe, including a possible switch to shorter-dated JGB tenors within the yield curve control framework.

In the shorter-term, the BOJ could act to defend its current yield curve control target of a 10-year yield of plus or minus 0.25%, MNI understands, by buying Japanese Government Bonds.

This week, 10-year JGB yields reached 0.205%, with potential implications for the yen if the rise continues.

PANDEMIC

In its next policy review, the BOJ will likely judge that exports and industrial production for the first quarter will be weaker than expected in January, with sentiment down sharply last month.

In addition to ongoing supply-side restrictions, the Omicron outbreak in Japan has led to additional pandemic control measures and work suspensions at some domestic factories that are seen as temporary, but were not predicted in January.

Fourth quarter GDP data, due on Feb. 15, is expected to show the first gain in two quarters.