MNI POLICY: Weak Services Prices Risk BOJ's 2% Target
MNI (TOKYO) - The Bank of Japan believes services prices will need to strengthen closer to 3% y/y on average to offset weaker goods prices and push the economy to meet its 2% price target sustainably to ensure a further hike later in the year, MNI understands.
Goods prices have on average risen about 4-5% but they are likely to slow, meaning services will need to lift from their average 1.5% y/y growth to support the BOJ’s baseline scenario.
Price revisions and wage hikes in or after April will help drive upward momentum of services prices and strengthen the foundation for the bank’s 2% price target. However, BOJ officials are concerned private consumption could lose momentum, particularly if consumers reject price rises set to occur between January and April among 4,000 goods, which will endanger further sustainable price rises.
Bank officials expect private consumption to grow at a modest 0.5% annualised this year, despite positive real-wage growth, weighed down by demographics and the low potential economic growth rate. The BOJ also believes a steady rise among administered prices – such as utility charges and imputed rents – are necessary to strengthen services prices, despite their failure to rise for decades.
The Board voted to hike the policy rate 25 basis points to 0.5% last week and signalled the potential for a further increase in another six months. (See MNI BOJ WATCH: Ueda Flags More Hikes, No Clear Timeline)
INFLATION EXPECTATIONS
Bank officials also doubt medium- to long-term inflation expectations, currently around 1.5%, will move toward 2%.
While business expectations seem to be anchored at around 2%, household expectations – boosted by higher prices among daily necessities – are moving at around 1.5%. Market expectations also remain anchored around this level, suggesting strong doubt among traders and commentators that the BOJ can achieve its 2% price target and hike the policy rate to 1%.