MNI POLICY: BOJ Confidence Grows As Focus Shifts To December

MNI (TOKYO) - Bank of Japan officials are increasingly confident prices and wages data will further confirm progress towards the Bank’s 2% inflation target in time for the likely next rate hike as early as December, MNI understands.

Officials are focused on whether real wages will stay in positive territory in August after the impact wanes of the corporate bonuses which boosted them in June and July to grow 1.1% and 0.4% respectively. Bonuses and other special awards rose 6.2% y/y in July, but overtime pay fell 0.1% y/y.

The BOJ's focus has now turned to whether improving real wages will pave the way for consumer spending to gain further momentum, which officials see as resilient despite businesses potentially increasing prices in October, an issue they will monitor closely – especially among services – to examine the strength of the wage-price virtuous cycle ahead of next year's round of pay increases. Officials also note companies are more prepared to pass cost increases to consumers since the Covid pandemic.

YEN IMPACTS

While MNI understands that the BOJ is likely to pause in its tightening cycle in September, given market volatility and uncertainty over the extent of a U.S. slowdown, its decision to raise the policy rate to 0.25% from a range of zero percent to 0.1% in July was designed to address upside risks to prices preemptively. (See MNI POLICY: BOJ Set For Sept Pause, Rate Hike Path Intact)

The stronger yen seen since has partially alleviated concerns over the impact on prices of previous currency weakness, but officials still consider the BOJ to be behind the curve. Bank officials also see that the correction of the yen’s fall will not cause prices to drop as some firms that could not previously transfer higher costs will not lower their prices, which will help maintain upward inflation pressure. 

Governor Kazuo Ueda and colleagues have repeatedly said the Bank will gradually adjust the degree of easy policy if the economy and prices remain on track.

Given current inflation, short-term real interest rates are now estimated by the BOJ to be about -1.5%, considerably lower than the neutral interest rate at least around 1%. Upward pressure on prices triggered by overseas shocks is causing negotiated nominal wage hikes on the back of labour shortages and higher prices. Japanese services companies, for which labour makes up a high component of costs, are also following goods providers in raising prices, in a departure from previous deflationary norms.

If inflation fails to moderate as the BOJ expects, officials fear that it will erode real wages and undermine consumption.