REPEAT: MNI INSIGHT: BOJ Watching Higher Cost Drag on Spending

--Spring Round Of Wage Negotiations Could Be Key To Spending, CPI Pick-Up

By Hiroshi Inoue

     TOKYO (MNI) - Only a month after the Bank of Japan board upgraded its view

on consumer spending, some officials are concerned that the rising cost of

living and slow wage growth may dampen consumption, which has turned firmer but

still lacks strength, MNI understands.

     Although they meet in early March, the BOJ's next key policy meeting is on

April 26-27, by which time the BOJ board will have seen the results of

labor-management talks on wages for those working for large firms for fiscal

2018 starting in April. There will be also some indications of whether some

firms are raising retail prices to reflect higher costs for the new fiscal year.

     BOJ economists expect the pace of year-on-year increase in the core CPI

(excluding fresh food) to pick up from +0.9% seen in November on the back of

sustained economic recovery and a wider positive output gap.

     But how far it can go depends on how much wage hikes will ease the impact

of rising prices of daily necessities.

     --FOCUS ON BASE WAGES

     BOJ economists are counting on wage hikes to be triggered by higher

consumer prices in 2017, record high corporate profits and the continued

tightness of labor market conditions.

     They see the conditions surrounding wage hikes are stronger than last year

but they also suspect base wages may not raise so much as many firms remain

cautious about acting and pushing up fixed labor costs.

     Annual wage negotiations at major companies are settled around mid-March,

setting an overall trend, although smaller firms may not necessarily follow

suit.

     BOJ economists are watching how much average base wages will be increased

following a 0.48% increase in the previous year, when total average wages rose

1.98% on year.

     Japan's main business lobby Keidanren has urged its members to raise wages

by 3% for fiscal 2018 but it is uncertain how much total average wages will be

raised.

     A 3% total wage hike on average could push up base wages by around 1.5% but

that seems unlikely. Many companies are more likely to offer higher bonuses than

jacking up base wages so they can avoid raising fixed costs.

     --CONSUMER SPENDING STILL FRAGILE

     Despite the upward revision to its assessment last month, BOJ economists

still feel "a little uneasy" about consumer spending, compared with the strength

of other economic components.

     That is why the BOJ said in its policy statement in December that consumer

spending is "increasing moderately, albeit with fluctuations" instead of simply

saying it is increasing.

     For over two years until December, the BOJ had been describing lackluster

consumer spending as "resilient."

     After the Dec. 20-21 policy meeting, government data showed real average

household spending posted the first year-on-year rise in three months, up 1.7%

in November, led by higher expenditures on electrical appliances and eating out.

     The core spending index, which excludes housing, motor vehicles and other

volatile items (close to private consumption patterns in GDP data), gained 2.7%

on month in November on a seasonally adjusted basis, the first rise in two

months.

     In addition, the BOJ's supply-side Consumption Activity Index rose a real

0.5% on a seasonally adjusted basis in November for the second straight rise

after rising +0.5% in October.

     BOJ officials believe a virtuous cycle from income to spending continues to

work, but they are also aware that consumption must gather steam further in

order for more companies to pass along higher costs to retail prices. That would

be necessary to help the central bank achieve its 2% inflation target.

     --APRIL MEETING AFTER WAGE HIKES

     Wage hikes at major companies will be decided in mid-March after the BOJ

policy meeting on March 8-9. That information will be used among BOJ board

members to provide their economic forecasts and risk analysis in the quarterly

Outlook Report, which will be released after the April 26-27 meeting.

     Wage levels for those working at smaller firms are set later and will be

reflected in the government's monthly labor survey from May through July, which

won't become available until the July to September quarter.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com