MNI POLICY: BOJ To Upgrade CPI Outlook, But No Tweak Imminent

The Bank of Japan is set to revise up its 2023 core-core inflation estimate, increasing the likelihood of what it would regard as a healthy wage-price spiral into next year, but the outlook for subsequent years is still not sufficiently inflationary for the Bank to consider tweaks to monetary policy any time soon, MNI understands.

The Bank’s median core-core inflation forecast will be raised from April’s 2.5%, as service prices in particular pick up in response to wage hikes. The BOJ’s outlook report showed seven out of nine board members saw upside risks to prices this fiscal year and Governor Kazuo Ueda has said some board members saw a realistic possibility of achieving 2% inflation on a stable basis.

But, while higher inflation in 2023 will increase pressure on businesses to again raise wages in 2024, the BOJ’s baseline view will remain that the year-on-year rate of increase in core-core CPI will decelerate through the second half of this fiscal year as impetus from higher import prices gradually wanes. The Bank’s forecasts for core-core inflation in 2024 and 2025 are likely to be little changed from the 1.7% and 1.8% foreseen in April.

RISK MANAGEMENT APPROACH

This means that Ueda, who is laying the groundwork to gradually phase out ultra-easy policy, is unlikely to take action soon unless the yen weakens sharply or bond market distortions flare again. Ueda is taking a “risk-management approach” to policy, and has stressed that risks of undershooting the 2% inflation target due to premature tightening are greater than those of seeing excessive price rises due to a delayed policy move. (See MNI INTERVIEW: BOJ Won't Move On YCC Before July - Sakurai)

However, Bank officials are conscious of significant uncertainties. While inflation may prove more persistent than they expect, they are also closely following the effects of tightening by the Federal Reserve, which raises the chances of further financial instability and of a U.S. downturn.

Core-core inflation jumped to 3.8% in March in year-on-year terms, up from the average 1.1% last year, which has already prompted significant wage increases for this year. Core CPI rose by 3.1% in March, up from an average of 2.3% last year.