MNI POLICY: BOJ Worries High Costs Will Hurt Q1 Spending

Bank of Japan officials are focused on whether a higher-than-average propensity to spend can be maintained, as they worry higher prices may weigh on private consumption that is being supported by pent-up demand, MNI understands.

Whether the propensity-to-consume gains further momentum in the first quarter will be key to forecasting the outlook for spending, which is recovering but is still at low levels.

Bank officials are monitoring the drag from high prices and living costs on spending, and are focused on whether the impact may not be big as expected. They are focused on the impact of low real purchasing power on spending as the BOJ has underestimated that relationship in the past. (See MNI BRIEF: BOJ's Kuroda Says CPI To Slow After Rising Above 3%)

The BOJ's baseline view is that private consumption is expected to be affected by price rises. However, pent-up demand is likely to be seen in areas like travel and dining-out, supported by household savings accumulated as a result of pandemic-related restrictions. The data suggests demand for travel and dining has been strong. Government stimulus measures are likely to support demand.

While Covid remains a threat, it's impact on spending appears to be waning. Spending on dining and travel was dampened by a rise in Covid-19 cases between the second half of July through the first half of August 2022, but the degree of decline was small relative to past COVID-19 outbreaks, the BOJ estimates. Even if Covid-19 cases surge, the government is unlikely to adopt new restrictive measures. (See MNI BRIEF: BOJ To Clarify Stimulus Impact in Jan - Kuroda)

BOJ officials judge that overall economic developments are tracking as they forecast in October despite the contraction in the third quarter. The economy is expected to rebound in the fourth quarter as spending remains solid even as exports and production slow due to cooling overseas demand.

Japan's economy contracted in the third quarter for the first time in four quarters due to weak net exports, although private consumption and capital investment rose. Third quarter GDP fell 0.3% q/q, or an annualised decline of 1.2%.