MNI POLICY: BOJ Studies Inflation Risks; Wages In Focus

Bank of Japan officials currently view the upside risk to inflation as small, but they are focused on how corporate price-setting and the economy evolves from January as they seek to avoid making the same mistake as the Federal Reserve did in underestimating the threat of inflation, MNI understands.

If the BOJ gains confidence that inflation is edging higher, it may allow the bank to start considering a change in the outlook for monetary policy. Japan's core CPI rose at a 3% y/y pace in September. (See MNI BRIEF: Japan's Sep Core CI Rises 3%; Highest Since 1991)

The board’s median forecasts for core CPI in fiscal 2023 and in fiscal 2024 are for rises of 1.4% and 1.3%, respectively, and those forecasts - which include a wage hike next April - are higher than those of private economists’ forecasts. The BOJ is expected to raise its CPI forecast when it meets next week. (See MNI POLICY: BOJ To Lift FY22 CPI Forecast; Trim Growth View)

Bank officials don’t have sufficient evidence to change their baseline view that the year-on-year rise in consumer price index will slow and fall below 2% in fiscal 2023 and the price target will not be achieved for the projection period to March 2025.

However, they are vigilant against the risk that Japan’s CPI may not weaken as much as they expect and will stay at high levels, depending on the global economic outlook, pass-through of high costs and wage hikes.

The BOJ had learned a valuable lesson from the Fed’s experience in falling behind the curve in its assessment of inflation risks. The Fed has been forced to raise interest rates rapidly to tame inflationary pressure.

Bank officials expect Japan’s CPI to stay at high levels at least until January but they expect the year-on-year CPI to fall sharply from February due to the base year effects. Pass-through of cost increases is expected to continue this year, although the pass-through is assessed to have largely peake in October.

WAGES IN FOCUS

Bank officials have received information that firms will not consider further raising retail prices next year unless they face additional cost increases. The bank is focused on corporate price-setting from January. If overseas economies remain solid and price hikes continue in the first quarter of 2023, this will increase pressure on firms to implement reasonable wage hikes.

One-time wage hikes aren’t sufficient to change people inflation expectations. The impact of April's wage hikes on households will last for the fiscal year, somewhat easing the impact of high costs.

The Japanese Trade Union Confederation, known as Rengo, seeks an increase of about 5%, which represents a rise of about 3% in base pay along with a seniority-linked bump of roughly 2%. The BOJ and private economists are unsure that a price-wage spiral will develop as the rise in CPI was mainly due to cost-push factors and wage hikes were small.

Prime Minister Fumio Kishida has asked firms to aim for pay hikes that keep pace with accelerating inflation in wage negotiations in April 2023 as he seeks to achieve both economic growth and income redistribution amid the rising cost of living. The government will expand subsidies for smaller firms on conditions that they raise wages.