MNI POLICY: BOJ Sees Intact Recovery, Policy Change Ahead

Bank of Japan officials believe recent weak domestic-demand data will not impede the Board’s desire to remove negative interest rates over the coming months as the economy will sustain the recovery, MNI understands.

Private consumption has lacked strength and remained sluggish amid price hikes and the implementation of capital investment has remained weak due to high uncertainty, and despite strong plans. The slowing y/y rise of the consumer price index and wage-hike hopes will boost private consumption over the coming months, while falling material prices and solid demand linked to labour savings and R&D will increase capex, keeping the economy on a recovery footing.

Japan's trimmed mean measure of underlying inflation rose 2.6% in December, the third straight monthly deceleration following November's 2.7%, and September's record 3.4% high, the BOJ noted last month. MNI has reported the BOJ Board could move to end negative rates at the March or April meeting on strong wage-hike data. (See MNI POLICY: BOJ To Pursue Mkt Friendly Hikes After Policy Exit)

Bank officials believe inflation will rise again after slowing toward the middle of the year but see uncertainty over the pace of its recovery – noting it may not strengthen as smoothly as expected – thanks to concerns over the second force of inflationary pressure, or the relationship between wages and prices. Some bank officials want to phase out easy-policy settings before mid-year to limit the risk the BOJ misses its opportunity, should it take a longer wait-and-see approach.

A number of more skeptical board members want to see stronger wage data, particularly among smaller employers, before exiting easy policy settings. (See MNI POLICY: BOJ Policymaker Caution Could Impede Board Consensus)