MNI POLICY: BOJ Cheers Tankan As Inflation Expectations Rise

The Bank of Japan's December Tankan survey confirmed corporate price hikes and inflation expectations remain solid, aligning with policymakers' forecasts as they seek confirmation over coming months of a sustainable level of higher inflation that could lead to early discussions about a change in the BOJ's easing bias, MNI understands.

BOJ officials have been heartened by solid inflation expectations among corporate executives, which will likely pave the way for firms to raise wages next spring, the Tankan showed. Both short- and medium-term inflation expectations at Japanese firms rose in the three months to December, endorsing the BOJ’s view that inflation expectations are rising and firms are more positive about raising retail prices. (See MNI POLICY: BOJ Policy Shift Needs Firm Tankan Inflation View)

On average, companies saw the annual consumer inflation rate at a record high of 2.7% a year from now, up from 2.6% in September. They also saw a record high 2.2% rise in three years, while the five-year outlook remained steady at a record high 2%, compared with increases of 2.1% and 2%, respectively in the September survey. (See MNI BRIEF: Dec Tankan Shows Sentiment Drop; Solid Capex Plans)

The Tankan showed the diffusion index of “Rise” minus “Fall” with regards to changes in output and input prices continued rising among major firms, showing firms plan to transfer high costs to retail prices in the coming months. Smaller firms that haven’t sufficiently transferred high costs to retail prices and are lagging behind major firms are more positively considering raising prices.

However, bank officials have reservations about the December results as the survey didn’t sufficiently highlight the impact of lower crude oil prices on corporate inflation expectations. Officials are focused on how the corporate inflation view evolves in the March Tankan survey due out on April 3, and the degree of wage hikes among major firms in mid-March and wage hikes among smaller firms afterward.

Bank officials are focused on wage hikes next spring, which will prevent private consumption from losing momentum, and will enable businesses to raise retail prices, and then push up the inflation rate. This would trigger a cycle of wage-price rises that bank officials are seeking to achieve their 2% price stability target in a stable and sustainable manner.

Weaker-than-expected wage hikes will cause the BOJ to lose hope that it is close to achieving its price target. However, a solid wage hike will pave the way for the BOJ to be more optimistic about achieving its price target.

The global economy is set to slow next year due to rate hikes by major central banks. This will put downward pressure on exports and production, and increase uncertainties, which will be a headwind for wage hikes. However, bank officials maintain the view that an environment for firms to raise wages remains as executives see the need to raise wages not only to retain talented staff but also to ease employees’ pain of higher living costs.

Officials believe executives will face difficulties in using global economic uncertainties as an excuse to cap wage hikes unless global growth deteriorates sharply.