MNI POLICY: BOJ April Action Will Hinge On CPI Result

The Bank of Japan board's decision to exit negative rates policy at the April 25-26 session will hinge on services price inflation found with the Tokyo consumer price index due to publish the last day of the meeting, MNI understands.

However, the government could pressure the BOJ to shift policy at the March 18-19 meeting should the yen weaken further. JPY has fallen about 5.5% YTD against the greenback and was trading at about 150.684 at publication.

BOJ officials have found the relationship between wages and prices – or the so called secondary force – difficult to predict as Japanese businesses cannot pass on higher labour costs easily.

While the Japanese public accept higher costs caused by elevated import prices, they are less forgiving of inflation driven by increased labour expenses, making it difficult for bank officials to predict the impact on services. Businesses also do not publish price rises in advance, compared to goods-price adjustments, compounding the problem.

The Bank's baseline assessment holds that wage hikes will likely accelerate as persistent labour shortages and high corporate profits pressure firms to raise wages to secure necessary workers.

The strong pass through of high import prices to consumer prices – the first force – has made it easier for businesses to raise retail and service prices, which were widely accepted by consumers.

Bank officials believe high uncertainty exists for second-force price hikes and they want more data to ascertain its strength. The BOJ may still decide to hold its policy settings steady in April should services prices prove considerably weaker, pushing out change to the June 13-14 meeting.

However, even if the Tokyo CPI shows weak services prices, bank officials will carefully analyse it and extrapolate nationwide inflation. The share of services in Tokyo, however, differs from the wider nation.

MNI has reported the BOJ could exit its negative rates policy in April, however, March remains a possibility. (See MNI POLICY: BOJ Sees Intact Recovery, Policy Change Ahead)