MNI POLICY: BOJ To Lift FY22 CPI Forecast; Trim Growth View

The Bank of Japan board is expected to revise up its median forecast for inflation this fiscal year as corporate pass-through of cost increases has been stronger and more broad than predicted in July, MNI understands.

BOJ officials, who will also trim their 2022 growth forecast, are likely to lift the median forecast for inflation from 2.3% to above 2.5% at the Bank's Oct 27-28 meeting. However, they will maintain their outlook for year-on-year core CPI to slow in fiscal 2023 as resource prices ease and on uncertainties over wage hikes. (See MNI: BOJ Worries About Surge In Oct Tokyo CPI, Hit To Spending)

BOJ Governor Haruhiko Kuroda told reporters in Washington that Japan's core CPI will likely fall below 2% y/y in or after fiscal 2023.

The expected upward revision will not lead to any policy adjustments unless the BOJ is confident of a sustainable rise in medium- to long-term inflation expectations accompanied with wage hikes.

Bank officials expect resource prices to ease in 2023, which in turn will contribute to a lower CPI, but they are vigilant against the risk that a continued weak yen will increase upward pressure on CPI through import prices and durable goods.

In the Outlook Report released in July, the median forecasts for core CPI in fiscal 2023 and 2024 were 1.4% and 1.3%, respectively, slowing from 2.3% this fiscal year, meaning the BOJ's desired target of achieving its 2% price target in a stable and sustainable manner will not be achieved.

The expected CPI slowdown in fiscal 2023 and 2024 means the BOJ will not be in a position to consider adjusting its easy policy and tweaking its forward guidance for the policy rates even though the new BOJ governor takes office in April 2023.

Reasonable wage hikes next April, and sustainable wage rises longer term, are needed to establish a virtuous cycle of rising wages and prices. Wage growth has been low and inflation has been muted for a long time. (See MNI INSIGHT: BOJ Policy Waits On Small Firm Wage Hikes)

Officials also calculate higher CPI and a drop of real purchasing power will squeeze private consumption as it is very unlikely that wage hikes catch up with or exceed price rises.

LOWER GROWTH

As for the bank's economic growth forecast, the median forecast in fiscal 2023 is expected to be revised down from July’s 2.0% as the global slowdown weighs on exports and production. However, the impact of weaker global demand will be somewhat alleviated by easing supply-side constraints.

Bank officials expect exports and production to be weighed down by slower growth overseas. They think exports and production will not fall as much as global growth slows as there is a buffer from high order levels for automobiles and capital goods to be used for capital investment.

Unless overseas economies fall into a deeper recession and the high orders disappear, Japan’s exports and production will be supported by high order levels.

The International Monetary Fund on Oct. 11 trimmed its 2023 growth forecast for Japan's economy to 1.6% from its July estimate of 1.7%, while its 2022 forecast was left unchanged at 1.7%.

The IMF lowered its global economic growth forecast for 2023 to 2.7% from July’s estimate of 2.9%, although it left this year's forecast unchanged at 3.2% and warned “Risks to the outlook continue to be on the downside.”