MNI INSIGHT: Inflation Over 3% Not Enough For BOJ

The Bank of Japan sees a risk prices will rise more quickly than officials had anticipated at their July meeting, but a jump in inflation to 3% or higher later this year will not be enough to prompt any shift in its easy policy stance unless it feeds into an acceleration of wages next spring, MNI understands.

Higher food prices, supply side constraints and the failure of government subsidies to curb an increase in petrol prices are set to push inflation well above the BOJ’s 2% price stability target. The central bank has also been monitoring yen depreciation, though it is factoring in a slowing global economy as well and would only be likely to adjust its policy if the currency were to stabilise at a level weaker than 140 to the dollar, from around 135 now. (See MNI INSIGHT: BOJ Eyes Autumn Move If Yen Steadies, Prices Rise)

But without significant wage hikes, BOJ officials will maintain the view that annual CPI increases are likely to slow or decline in fiscal 2023.

UPWARDS REVISIONS

In July, the BOJ pointed to medium-term upside risks to prices, revising its core CPI forecast for this fiscal year to 2.3% from April’s 1.9%, and its 2023 outlook to 1.4% from 1.1%.

Retailers are becoming more willing to raise prices as leading brands lead the way. Retail prices, particularly in services, tend to be revised in April and October, with more than 6,300 items set to see increases in October, up from 2,431 in August.

Subsidies aimed at capping higher petrol prices have had only limited effect at a retailer level, particularly outside bigger cities, and are set to end on Sept. 30. July Tokyo CPI data showed energy prices rose 23.5% y/y in July, accelerating from +21.7% in June.

Wholesale prices for durable goods, mostly imported, are also rising, putting pressure on retailers to up their own prices.