MNI POLICY: BOJ Hikes To Weather Weaker Consumption

The Bank of Japan expects consumption growth to ease back to around a 0.5% rate gradually, after what it regards as an unsustainable move higher to 1% in the second quarter, but this should be consistent with its monetary tightening plans, MNI understands.

While a fall below 0.5% in future quarters would raise doubts about whether further rate rises are appropriate, even if the economy and prices continue to move within forecasts, this is not the BOJ's base case.

Softer spending would prevent businesses from raising prices, or in some cases lowering them, which would weaken the wage-price cycle. However, it will take some time to confirm a change to the trend.

Private economists’ assessment of spending prior to the Board’s July hike, which led some market players to downplay a potential increase, has also concerned BOJ officials. While cabinet office data published prior to the July meeting showed private consumption had fallen in Q1 for the fourth consecutive quarter, the BOJ’s assessment was not as dire as private economists’ view, which was based on GDP and household spending, and they did not believe sluggish consumption would rule out a rate hike at the time.

SPENDING DOWNGRADED

The BOJ’s baseline view holds that wages will continue to improve and private consumption will hold steady despite being tempered by higher household savings.

While real wages remained positive for the second straight month in July, and rising nominal wages will boost consumption further, bank officials doubt spending will play a key role driving the economy. They also expect consumption to weaken in August temporarily due to the impact of the recent typhoon.

Policymakers will instead focus on how the U.S. economy evolves over the coming months and gauge its impact on capital investment and exports as a more important driver of the economy and monetary policy.

MNI reported this week the BOJ is considering the pace of future hikes and its neutral rate estimate. (See MNI POLICY: BOJ Examines Upping Pace Of Hikes)