MNI POLICY: BOJ Policy Shift Needs Firm Tankan Inflation View

Bank of Japan officials are awaiting March's Tankan survey to assess whether corporate inflation expectations continue to firm despite falling oil prices, offering the prospect of a virtuous cycle of higher prices and wages that is considered integral to any shift in the bank's easy policy settings in 2023.

Officials expect the December Tankan survey, which is due Wednesday, to provide some hints, but greater clarity on the durability of this year's upwards trend in corporate inflation expectations to record levels should be provided by the April 3 release of the March survey.

If the March survey shows inflation expectations remain solid, officials would be more confident that corporate price-setting behaviour has become anchored at a higher level and shaken off its deflationary mindset. However, an softer inflation outlook would disappoint hopes for an upward shift in price-setting activity.

The March Tankan survey will be released ahead of the BOJ's April Outlook Report, which could be the trigger for preliminary discussions about a change to the bank's easing bias should the forecast for the Consumer Price Index in fiscal 2023 be revised higher. (See MNI POLICY: BOJ Eyes 2023 CPI As Trigger For Policy Tweaks)

Officials have been heartened by the rise in corporate inflation expectations. The September Tankan showed companies expected the annual consumer inflation rate to be at a record high 2.6% in a year, up from 2.4% in June. The survey also showed a record high 2.1% inflation in three years and a record high 2% increase five years ahead, compared with 2% and 1.9%, respectively in the June survey. Bank officials are particularly focused on the corporate view five years ahead as a gauge of inflation expectations. (See MNI POLICY: BOJ Needs More Flexibility As Easing Maintained)

Corporate inflation expectations have trended higher since March 2021 due to a combination of a weaker yen, elevated commodity prices, and high costs. The inflation outlook fell in 2015 and 2016 as crude oil prices moved lower.

The corporate inflation outlook should weaken as crude oil prices fall and global demand slows as central bank rate hikes bite. However, officials have had difficulty in analysing the underlying trend of corporate inflation expectations, and the drivers of these views, due to the lack of historical data. The BOJ only began gathering the data in 2013 and bank officials have struggled to get a signal amongst the noise.