MNI POLICY: BOJ To Raise FY23 CPI, Stick With Base 2% View

The Bank of Japan is expected to raise its median inflation forecasts for the 2023 and 2024 fiscal years in its January Outlook Report to reflect companies passing on higher costs to retail prices, MNI understands.

The expected upward revisions from October's forecast of a 1.6% CPI increase for both years will come after the completion of the BOJ's January 17-18 meeting, and will feed speculation that policy will be further tweaked after the central bank widened the band on its 10-year yield target to 50bp from 25bp in December. (See MNI BOJ WATCH: Kuroda Dismisses Shock Shift As Tighter Policy)

However, the BOJ will likely maintain its baseline view that the year-on-year core inflation rate will stay below 2% in fiscal 2023 and 2024, prompting policymakers to maintain easy policy at the January meeting. The BOJ will maintain easy policy as the achievement of the 2% price target in a stable and sustainable has not come into sight.

The impact of corporate price hikes on the CPI will be somewhat eased by government subsidies to lower electricity and gas charges from February. But corporate price hikes are expanding to services from goods, and to daily necessities from food, pushing up the core CPI in fiscal 2023.

Government subsidies and electric power firms’ requests to raise charges are making it difficult for BOJ economists to predict the outlook for inflation.

Despite the expected forecast changes at the January meeting, it is the BOJ's April meeting that looms large in telegraphing potential changes in policy. Under the stewardship of a new governor, policymakers will update the central bank's medium-term economic growth and inflation view after wage hike data from major firms becomes available in mid-March. (See MNI POLICY: Kuroda's Legacy Looms As Leadership Race Narrows)

Benchmark wage hikes will be determined by negotiations at major companies, but bank officials are focused on wage hikes among smaller firms. Smaller firms will raise wages a few months after wage hikes at large companies, and wage decisions will be available through government wage data in or after June. (See MNI POLICY: BOJ Studies Inflation Risks; Wages In Focus)

Bank officials are also focused on revised wage data to be released by the Japanese Trade Union Confederation, or Rengo, after the union releases the first round of wage hike data in March.