MNI POLICY: BOJ Vigilant Against Weaker Private Consumption

Bank of Japan officials are alert to the risk that private consumption may lose momentum as low-income households are hit by high electricity and gas charges in addition to high food prices, MNI understands.

Officials judge that private consumption is weakening as pent-up demand slows and amid high utility charges, though consumption is viewed as broadly holding up.

However, there is a focus on the risk that private consumption will lose momentum due to larger-than-expected price rises in the coming months, weakening one of the main engines for a sustainable economic recovery. Japan's retail sales grew 6.3% y/y in January. February retail sales data is due March 31 and January household spending data is scheduled for release on March 10.

Officials see no need to change the view that the year-on-year rise in consumer price index will slow in or after February on the back of the government’s subsidies to lower utility charges.

However, officials are vigilant against bigger-than-expected price rises in April when many businesses revise their prices at the beginning of new fiscal year in addition to previously planned price hikes. (See MNI BRIEF: BOJ Must Keep Easy Policy As 2% Not Hit - Nakagawa)

Prices of 3,442 items and of 4,892 items will be raised in March and April, respectively, following price hikes of 5,528 items in February and 7,864 items last October, when firms traditionally revise prices, a survey conducted by Teikoku Databank showed.

Many processed food companies have announced plans to raise retail prices. However, consumer prices haven’t risen immediately as retailers sold inventories that they bought before price hikes, with the sale of higher priced foods creating a one-month lag before the price hikes filter through to the Consumer Price Index.

WAGES GROWTH

If private consumption loses momentum, it will increase the risk of a weaker economy as both exports and production face downward pressure from a slowing global economy.

Household budgets continue to be pressured by weak real wages growth as 41-year high inflation saps spending power. Real - or inflation adjusted - average wages posted the first rise in nine months in December, rising 0.1% y/y. (See MNI BRIEF: Japan Dec Wages Rise; Real Pay Turns Positive)

The BOJ is keen to gauge the size of wage increases being negotiated at large companies and how that translates to wage negotiations among smaller companies. It is expected incoming BOJ governor Kazuo Ueda, who starts in the top job on April 9, will have a good read on wage increases across the economy by August. (See MNI POLICY: BOJ Wary Rising Staff Costs May Crimp Wage Growth). The BOJ holds its final policy meeting under Governor Haruhiko Kuroda on March 9-10.