MNI POLICY: Consumption Risk Could Make BOJ Hike Harder

Bank of Japan officials are concerned private consumption, weighed down by the weak yen, may not recover as expected and could negatively impact October price revisions crucial for rate hikes later in the year, MNI understands.

Higher prices driven by the weak yen have squeezed consumer purchasing power, despite the limited cost-push to date.

Sluggish private consumption will make it difficult for businesses to raise retail prices during October's annual price revisions, which bank officials are monitoring closely to gauge wage-price strength. The revisions will feature prominently in the Bank's Oct. 30-31 deliberations.

Bank officials are paying attention to wage developments and their impact on corporate price-setting this northern summer and wage data for July will be released on Sept. 5 before the Sept. 19-20 meeting.

The number of households that expect prices to rise increased to 82.0% from 80.6% from three months ago, according to the BOJ’s recent quarterly consumer survey, which also showed the number of households that experienced worse circumstances increased to 55.7% from 49.5%, driven largely by higher costs.

NOMINAL WAGE FOCUS

While bank officials believe falling consumer sentiment had bottomed, they are now focused on whether it continues to rise gradually on the back of increasing nominal wages, crucial for businesses to raise retail prices further and enable firms to implement October's price revisions.

However, the BOJ will monitor closely whether the price rises decrease demand.

Government data for May showed nominal wages rose 2.7% y/y, although BOJ officials were discouraged by April's weak result.

However, bank officials are examining whether May's increase was caused by the rise of basic salary or working hours, which rose 1.7% y/y against April's 0.2% fall. Revised May wage data is due July 25, while June results will be released on Aug. 6.