MNI POLICY: Debate Builds Over BOJ's 2% CPI Projection

Some Bank of Japan officials have challenged the Bank's view that the y/y core consumer price index (CPI) will fall below 2% toward the middle of the fiscal year, noting strong wage growth and ongoing cost pass-through could delay the reversion or soften its fall more than expected, MNI understands.

While the BOJ's view that y/y rise in the core CPI will fall below 2% toward the middle of this fiscal year (See: MNI BRIEF: Japanese CPI To Rebound After Mid-FY2023- Kuroda), some within the Bank believe the risk of stronger prices could delay the reversion. Wage strength, particularly at smaller firms suffering from a tighter labour market, could also increase upward pressure on consumer prices and core CPI, they argue.

Several board members cited upside risks to prices at recent policy-setting meetings, although most of the board members expect no change to the baseline assumption, according to the summary of opinions at recent meetings. BOJ officials lack sufficient information to change the baseline scenario and they will monitor how the economy evolves over the coming months. MNI understands the Bank will examine Q2 economic and price data carefully, which could trigger a review of its baseline economic recovery and inflation-rate estimates.

DATA POINTS

Several data points could impact Japan's core CPI. Energy prices will continue to moderate, putting downward pressure on core CPI, which supports the BOJ's current assumption. The BOJ also expects continuous pass-through of cost increases to continue.

The rise of y/y core CPI slowed to 3.1% in February from January's 4.2% due largely to government subsidies to utilities and the fall of crude oil prices. The underlying core-core CPI, which excludes fresh food and energy, rose by 3.5% y/y in February from January's 3.2% (See: MNI BRIEF: Japan's Feb Core CPI Rises 3.1% Vs 4.2% In Jan).

The BOJ expects core-core CPI to rise further and stay at high levels, but the y/y rise will likely slow as additional food price increases are unlikely this year, compared to last year's large increases.

The rise in import prices and upstream cost increases have also peaked, but cost pass-through in mid- and downstream continues as firms transfer high costs to retail prices. Cost increases are expected to continue for a wide range of goods and services in the short-term given the high degree of recent cost rises compared to previous cycles.