MNI INSIGHT: BOJ Fears Inflation Will Erode Demand Bounce-Back

Bank of Japan officials are worried that consumption will receive much less of a boost than previously expected from pent-up demand as Covid restrictions are lifted, and higher food and energy prices resulting from the Russian invasion of Ukraine erode purchasing power, MNI understands.

Officials will closely watch whether wages rise sufficiently to counter higher inflation, and whether households’ long-term inflation expectations rise sustainably to the 1.5% level seen as key to cementing the view that prices will continue to rise, see: MNI INSIGHT: Japan Factory Output Latest Dismal Sign On Q1 GDP.

More expensive crude oil is making processed food companies more willing to increase retail prices, after a long period during which prices have fallen and companies have been careful to set pricing at levels consistent with maintaining demand, officials calculate.

The share of items in the inflation basket seeing higher prices rose to 61.5% in January from 58.8% in December, the highest since the 61.8% seen in January 2020, BOJ data shows. The share of increasing items minus those decreasing jumped to 30.5% in January from 24.5%, the highest since August 2016’s 34.0%.