MNI POLICY: BOJ Sees Small Wage-Spiral Risk, Slower Hikes
MNI (TOKYO) - Bank of Japan officials doubt stronger-than-expected inflation will trigger a wage-price spiral and warrant faster rate hikes, as medium- to long-term inflation expectations remain anchored below the 2% price stability target, MNI understands.
Exports, capital investment and private consumption would need to strengthen for a wage-price spiral to develop. While the labour market has tightened, keeping upward pressure on wages, both exports and capex lacked strong momentum due to slowing overseas demand. Demographics and the low potential economic growth rate will also stunt private consumption, even though real wages remain in positive territory.
Markets have priced in a 0.75% policy rate by October, following last month's 25 basis point increase to 0.5%. (See MNI BOJ WATCH: Ueda Flags More Hikes, No Clear Timeline)
INFLATION EXPECTATIONS
Bank officials also doubt strengthening inflation – both core and trimmed mean CPI increased in December – will increase expectations, which have been anchored around 1.5% for some time.
Continued negative real interest rates have not overheated the economy and accelerated price rises, adding weight to the belief that the lower bound of neutral is likely below 1%, making rapid hikes this year toward that level less likely. (See MNI POLICY: BOJ Fears Neutral Lower Than Previously Estimated)
However they remain focused on whether future stubborn inflation will boost the medium- to long-term inflation expectations toward the 2% target, which would increase the risk of a wage-price spiral.
Bank officials expect the year-on-year increase in inflation driven by cost-push to slow in or after mid-year, although services prices are likely to continue rising steadily.
The BOJ is carefully examining the impact of January’s hike on economic activity, despite Governor Kazuo Ueda downplaying its effect, noting real interest rates remain significantly low.