MNI POLICY: BOJ Unaffected By Weak Underlying Inflation
MNI (TOKYO) - The Bank of Japan Board has renewed its internal assessment of underlying inflation, last made public in April, as remaining around 1.5%, despite a decline in several measures of the metric, MNI understands, with officials keen to send a message that tightening will continue despite a recent swerve to a cautious stance.
This reassessment will allow the Bank to continue to assert that underlying inflation should gradually trend toward the 2% target in the second half of its projection period until March 2027, in the absence of fresh shocks.
The BOJ had pointed to the sluggish rate of increase in underlying inflation when it held rates at its Oct 30-31 meeting, a decision which came despite officials insisting that other key data points for prices and activity were on a track compatible with higher rates. (See MNI BOJ WATCH: Ueda Opens Door To Dec Hike, Eyes U.S., Mkts)
This blurring of its communications comes as the Board is under political pressure not to raise rates quickly unless the yen slides, with weak underlying inflation allowing it to justify a cautious position. (See MNI POLICY: BOJ’s Political Concerns Slowing Hikes).
In balance, the BOJ is unlikely to make its next hike until next year, though a rise in underlying inflation to 2% would have forced its hand at its upcoming December meeting.
Trimmed mean inflation was 1.5% y/y in October, down from 1.7% in September and 3.0% in October 2023. Weighted median prices were 0.8% in October, unchanged from September but slowing from 2.2% in October 2023. Modal inflation fell to 1.3% in October, slowing from September’s 1.4% and 2.6% in October 2023.
Bank officials attributed the slowing year-on-year increases to base effects following sharp rises in 2023, and to the waning impact of high import prices caused by earlier yen weakness.
But Bank officials have been encouraged by the steady rise in services prices caused by labour costs and the rising imputed rent, which gained 0.9% y/y in Tokyo’s November CPI measure to the highest level since November 1994.
The BOJ Board next meets Dec 18-19.