The BOJ prefers a gradual pace as its current underlying inflation measure, last assessed at 1.5% in the April 2024 Outlook Report, and expectations remain below the 2% target. However, Bank officials believe recent price hikes may have pushed expectations higher and they are concerned their underlying inflation view will need to rise towards 2% at a faster-than-expected pace, which could prompt swifter hikes to ensure the BOJ stays ahead of the curve.
While the Bank in December reaffirmed its 1.5% stance, core-core CPI has continued to show resilience, rising 2.5% y/y in January, accelerating from December’s 2.4% and above the Bank’s target for 28 months. (See MNI POLICY: BOJ Unaffected By Weak Underlying Inflation)
The BOJ defined underlying inflation in 2016 as core-core CPI excluding fresh food and energy. While difficult, the BOJ will need to present its policy reaction function more clearly to increase accountability as underlying inflation moves closer to the 2% target.
ELEVATED EXPECTATIONS
High rice prices, which have continued to grow faster than projected, have likely helped to boost inflation expectations.
While the government will release up to 210,000 tons of stockpiled rice to wholesalers in mid-March to temper inflation, businesses will press forward with higher retail prices in or after April amid continued elevated labour and raw materials costs, which will add further pressure to expectations.