MNI POLICY: BOJ Eyes 2023 CPI As Trigger For Policy Tweaks

Bank of Japan officials may initiate preliminary discussions about adjusting monetary policy if its 2023 inflation forecast is revised up, laying the groundwork for a possible change in its easing bias after April should its 2% inflation target come into sight, MNI understands.

The BOJ's Outlook Report in April looms as a catalyst for early stage discussions as inflation estimates for the 2023 and 2024 fiscal years will take into account planned price hikes in February by Japanese companies. Officials, which will include a new BOJ governor in April, will also await wages data due after April's report. Whether the expected discussions lead to a guidance change will depend on the sustainability of corporate price hikes and wage increases.

An increase in the inflation forecast for fiscal 2023 from October's 1.6% estimate would make it difficult for BOJ officials to continue to state inflation will fall below 2% during the year, a claim that has allowed them to rule out changes to easy policy settings. (MNI POLICY: BOJ Needs More Flexibility As Easing Maintained)

Higher forecast inflation would prompt the BOJ to consider changing the easing bias in its forward guidance to neutral as a way of gradually easing towards possible adjustments.

Officials are worried that removing the -0.1% policy rate could be interpreted as a sign the BOJ's easy policy will end, possibly leading to uncertainty and hurting growth. While a shift from a negative policy rate would benefit Japan's banks, it could strengthen the yen temporarily. (See MNI POLICY: BOJ Watching Real Estate, Bond Threat To Banks)

The most troublesome issue confronting the BOJ is addressing its cap on 10-year bond yields. Yields have been capped at 25bp through the BOJ's fixed-rate bond buying operations. A sharp increase in long-term interest rates would rattle financial markets and increase home loan costs, with 70% of loans based on floating interest rates.

WAGES ARE KEY

Higher inflation rates accompanied by wage hikes would satisfy the BOJ's self-imposed conditions for considering tweaking its monetary policy framework. But higher inflation rates without reasonable wage hikes will complicate policy discussions as the BOJ will have to consider high inflation against a slower economy.

While central banks traditionally don't address inflation caused by supply-side factors, officials acknowledge the BOJ cannot completely ignore high prices if discontent grows among people because of the hit to real wages. Lawmakers will sympathise with public discontent and raise pressure on the BOJ to address high prices.

Pass-through of cost increases are largely within the BOJ's October forecast. However, recent price rises caused by cost pass-through and by more expensive durable goods imports are stronger than officials predicted. (See MNI POLICY: BOJ Worries High Costs Will Hurt Q1 Spending)

In addition to the price hikes on 6,700 item in October, prices on 3,300 item are set to rise in February, indicating pass-through of cost increases will continue for longer than expected. Tokyo Metro will raise subway fares for the first time in 28 years.