MNI POLICY: BOJ Sees Risk of Earlier Inflation Rebound

Bank of Japan officials believe the weak yen will drive an inflation rebound over the northern summer, sooner than bank economist expectations of an autumn bottom, which could drive the Board to consider raising its policy rate preemptively to keep ahead of the curve, MNI understands.

BOJ officials would prefer gradual rate increases over rapid hikes, which would considerably worsen economic activity.

The Bank estimates underlying inflation at about 1.7%, below its 2% price target, but the weak yen could boost that to 2% via the pass-through to imported goods.

The yen has depreciated by about 4% to the U.S. dollar since January and was trading at JPY154.664 on Monday morning.

The year-on-year rise of Japan's annual core CPI decelerated to 2.6% in March from February’s 2.8%, showing weaker pass-through of cost increases, data released by the Ministry of Internal Affairs and Communications showed on Friday. MNI reported this month the BOJ is monitoring the impact of the yen on household living costs and consumption. (See MNI POLICY: BOJ Concern Grows Over Yen Impact On Wages, Prices)

WAGE FOCUS

Bank economists expect the year-on-year inflation rate rise to accelerate around autumn based on stronger wage hikes at major firms, which will filter through to smaller companies and drive retail price hikes, but their confidence on this remains low as the strength of wage and price increases is uncertain. Smaller firms, however, will need to increase wages to secure workers.

Salaries will reflect actual wage hikes at smaller firms in or after June, however, it will take another two months to confirm the increases through government wage data.

BOJ officials will aim to ascertain wage hikes at smaller firms through continuous hearings and reports at the branch managers’ meeting in July, with a focus on their degree and how they filter through to services prices. (See MNI POLICY: April Services Data Key For Further BOJ Rate Move)

Japan’s import prices on a yen basis rose 1.4% y/y in March for the second straight rise following +0.2% in February, indicating increasing pressure on firms to raise prices, data released by the BOJ showed.

The recent rise in import prices will enable some firms that have not sufficiently transferred the past cost increases to raise prices on the pretext of high import prices.

The board will meet this Thursday and Friday.