MNI POLICY: BOJ Faces Policy Debate If High Inflation Persists

Bank of Japan officials will become more concerned about the persistency of price pressures if the year-on-year rise in core inflation doesn't start slowing in or after February, possibly triggering debate about policy changes, though not immediately as policymakers await crucial wages data, MNI understands.

A stronger yen and a presumed peak in import prices informed the BOJ's inflation forecasts calling for sub-2% inflation in its January Outlook Report, however policymakers are wary as the pass-through of higher corporate costs continues and major companies that have enjoyed increased profits are expected to implement bigger wage rises. The BOJ board’s median forecasts for core inflation in fiscal 2023 and 2024 are 1.6% and 1.8%, respectively.

BOJ board members largely share the view that the pace of inflation will decelerate due to a decline in crude oil prices and subsidies implemented to cap the cost of electricity and gas for households. But the prospect of stubborn core inflation and high wage increases has members on alert. Inflation continues to accelerate, with the Tokyo Consumer Price Index rising 4.3% y/y in January according to data released Friday, indicating national inflation will rise above 4% in January. (See MNI BRIEF: Japan Jan Tokyo CPI Rises 4.3%: Highest Since 1981)

The BOJ board will release the inflation rate forecast for fiscal 2025 - and possibly revise 2023 and 2024 estimates - at its April 27-28 meeting after assessing the scale of wage hikes at major firms in mid-March, the nationwide March CPI on April 21, and the Tokyo April CPI on April 28. (See MNI INTERVIEW: BOJ To Wait Until Aug To Gauge Wages - Momma)

Officials will analyse elevated inflationary pressures with consideration of the output gap, the outlook for overall wages, as well as inflation expectations, especially medium- to long-term expectations. Policymakers are also focused on corporate price-setting activity and inflation expectations to be revealed in the March Tankan due on April 3.

COUNTERMEASURES CONSIDERED

Officials will initially consider price moves transitory, but the bank may face the situation of considering countermeasures - such as tighter policy - to cope with stronger-than-expected prices even before the achievement of its 2% price target. A new governor will replace Haruhiko Kuroda, who has advocated easy policy until the 2% inflation target has been achieved in a sustainable and stable manner, on April 9. (See MNI INTERVIEW: New BOJ Gov Must Quash Normalisation Talk - Momma)

Bank officials are focused on a virtuous cycle between prices and wages. They are monitoring whether businesses that raise wages will pass on cost increases to their selling prices, which will then increase the momentum for wage hikes. Officials need more confidence about the sustainability of the price-wage cycle.

The BOJ differs from other major central banks that are raising interest rates to restrict price-wage spiral as it strongly hopes a price-wages spiral strengthens in order to achieve its 2% price target.

BOJ deliberations on the inflation outlook will also pay attention to the risk of a U.S. economic slowdown as rate hikes dampen demand. The BOJ's baseline scenario is the U.S. economy continues to slow, but it will not fall into a serious recession. If the BOJ maintains its baseline scenario, it will not prevent it from tweaking monetary policy based on the solid outlook for prices and wages.