(CORRECTED)MNI POLICY: BOJ To Avoid Inflation Signal

(Corrects to clarify BOJ thinking)

The Bank of Japan wants to avoid sending a message about the timing of any move away from ultra-easy policy with its upcoming Outlook Report inflation forecast, and even if its core projection from July's 1.6% is raised it will stress growing uncertainty over wages and the global economy, MNI understands.

At the same time a revision upwards of core-core CPI to 1.9% from July’s 1.8% would be classed as minor, as the Bank does not regard changes to forecasts of less than 20 basis points as implying a significant change of view. Any such move would also be accompanied by strong caveats about the need to wait for confirmation in spring wage data of a sustainable domestic inflation impulse.

An expected upward revision of this fiscal year’s core CPI forecast of 2.5% to close to 3% will not have much of an impact on the 2025 view.

Meanwhile, BOJ officials are increasingly concerned that weaker consumer spending, even if it does not derail the moderate economic recovery, might feed through into next year’s key earnings data, with signs that persistent declines in real wages could dampen corporate profits and the willingness of firms to pay workers more.

REAL WAGES SLIDE

Inflation-adjusted real wages slid by 2.5% in August year-on-year, the 17th straight drop though down from the 2.7% fall recorded in July. Weak base pay for regular workers, whose increase slowed to 1.8% in August from 2.4% in July, also troubled officials, with indications smaller firms were under particular pressure.

In addition, weak scheduled earnings (+1.8% in August vs. July’s 2.4%) troubled bank officials as they indicated that wages, including those of smaller firms, hadn’t risen as much as hefty spring wage hikes.

Scheduled earnings are closely watched by BOJ economists to examine wage conditions on a nominal basis and the economists are focused on revised August wage data due out on Oct. 24.

Still, officials expect the decline in real purchasing power to bottom, while positive real wages are not an essential condition for the BOJ to move away from yield curve control or negative base rates next year. Revised August wages data on Oct 24 will be closely watched by the Bank. (See MNI INTERVIEW: BOJ Yield Curve Move Possible In January-Kameda)

Weaker government surveys on consumer sentiment are also concerning officials. While the Bank does not regard these as providing a reliable guide to near-term spending, they are a useful leading indicator for underlying trends.

The sentiment index and the outlook index for two to three months ahead in the Economy Watchers Survey posted second consecutive drops in September, as did the Japanese consumer confidence index, which saw all components worsen, prompting the Cabinet Office to lower its assessment from the previous month for the first time since November 2022.