MNI POLICY: BOJ To Consider Soft Yen Price Impact, Hikes Delayed

The Bank of Japan will not raise its policy interest rates immediately as officials monitor the impact of the weak yen on underlying inflation, wage hikes and consumption over the next few months, with hikes more likely after it confirms small business wage hikes in August, MNI understands.

While the softer currency initially makes imports more expensive, bank officials must examine how it affects downstream prices and whether it leads to wage, and services price hikes to determine the impact on the underlying inflation trend.

The BOJ will not adjust policy to address the weak yen as the bank is not targeting the foreign exchange rate specifically, but it will tighten rates should inflation move in line with predictions or if the upside risk strengthens. (See MNI POLICY: BOJ Stays On Sidelines As Yen Weakens)

JPY has weakened about 10% against the U.S. dollar over the last 12 months and was trading at 156.714 on Tuesday morning.

SMALL FIRM WAGES

The government will publish monthly wage data for June on Aug 6, giving the bank its first concrete insight into wage hikes at smaller firms, with further updates provided over proceeding months. However, bank officials will also receive partial small-firm wage hike confirmation through branch hearings and surveys before the June data is published.

BOJ officials continue to monitor whether smaller firms raise wages in or after June as much as spring wage negotiations showed and how private consumption has changed. They are also focused on whether wage hikes and consumption has put upward pressure on prices.

The officials will focus mainly on whether private consumption gains momentum amid rising wages. While price hikes have hurt consumption, bank officials doubt it will derail from a recovery path.

Instead, those officials will monitor how wage gains and consumption developments influence corporate price-setting behaviour, particularly services prices, to examine the strength of the underlying inflation trend.

An outline of corporate price revisions should be available before October when many businesses revise their retail prices. Bank officials consider the October price revisions key to examine the underlying inflation trend.

Policymakers will also review their medium-term economic growth and inflation projections at the July 30-31 meeting after the release of the BOJ June Tankan due out on July 1 and the branch managers’ meeting in mid-July.

The board will next meet between June 13-14.