MNI POLICY: Oct Price Revisions Key To Further Rate Hikes

Corporate goods and services price revisions made available around October and following the publication of revised wage-hike data at smaller firms will fuel chances of a Bank of Japan rate hike later in the year, MNI understands.

BOJ Governor Kazuo Ueda in a recent interview with a local newspaper said the probability of achieving the bank’s 2% inflation target will increase over the northern summer and autumn when hefty wage hikes won in the spring wage negotiations are reflected in prices. The board will consider a further increase to its policy interest rate should the probability of achieving the bank’s 2% target increase, he added.

Ueda believes the October price revisions represent a key factor that will drive policy change. Wage hikes at smaller firms will be updated seven times by July, further illustrating the impact of high labour costs on retail and services prices.

The April Tokyo consumer price index result due April 26 will also illustrate whether services prices are strengthening and strong data may trigger discussion over policy change despite rate hikes a distant possibility until later in the year. (See MNI POLICY: April Services Data Key For Further BOJ Rate Move) However, BOJ officials will place greater emphasis on the wider nationwide CPI result due April 19 as services prices are not uniform across the country.

Japan's corporate goods price index rose 0.8% y/y in March vs. February’s 0.7%, the second straight acceleration, data released by the Bank of Japan showed on Wednesday.

WEAKENING YEN

Bank officials will also pay close attention to how the weak yen strengthens the wage-price virtuous cycle by pushing up import prices and causing pass-through of cost increases, impacting household living costs and weighing on consumer spending, which will impede corporate price hikes.

However, the officials do not expect spending to derail from its recovery path immediately as elevated real wages driven by the slowing rise of the CPI will blunt the negative impact from the higher living costs.

The year-on-year drop of inflation adjusted real wages, a barometer of households' purchasing power, widened to 1.3% in February from a 1.1% fall in January, preliminary data showed. February’s real wages stayed in negative territory for the 23rd straight month, impeding spending by households that have been hit by high prices.