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REPEATL MNI INSIGHT: BOJ Blames Productivity Gain for Slow CPI

--BOJ To Repeat Mechanism To Raise Inflation Toward 2% Target Working
By Hiroshi Inoue
     TOKYO (MNI) - The Bank of Japan is expected to blame persistent structural
factors, including productivity gains, for consumer prices' slow response to the
improving output gap and tightening labor supply, in a statement due out after
its July 30-31 policy meeting, MNI understands.
     The BOJ board is unlikely to cite any fresh factors for the slow pickup in
consumer prices and wages, but it will note that some factors that have been
already mentioned are "having a stronger impact."
     Structural issues, such as a slow rise in legally set low wages for
care-givers and daycare workers, falling rents amid the shrinking population and
depressed service prices, continue to put a lid on inflation. Stiff competition
among retailers is also keeping prices from rising steadily.
     --PRODUCTIVITY HAMPERING INFLATION
     Firms are increasing productivity to absorb higher costs through
labor-saving capital investment in robots and information technology, exerting
downward pressure on prices "more strongly" than BOJ economists expected
earlier.
     Excess workers and those in low-productivity sectors are moving to other
companies and industries, leading to higher productivity for some firms and
restricting consumer price gains, the BOJ views.
     --SLOW GAP IMPACT
     Those factors are weakening the effect of the recent improvement in the
output gap on wage and price hikes, and slow price rises are keeping inflation
expectations low.
     In May, the BOJ said, "The output gap improves in line with economic
expansion, which will raise actual prices by making firms' wage- and
price-setting stances more proactive." It added that this mechanism was still
working.
     However, the widening of the positive output gap -- tighter supply and
firmer demand -- has not led to substantial wage and price gains as the BOJ
expected a few months ago.
     In May, the BOJ also said, "As actual prices increase, firms' and
households' medium- to long-term inflation expectations rise, which will further
push up the actual inflation rate."
     However, inflation expectations haven't risen as much as the BOJ predicted
because actual price rises have been slow.
     --STUBBORN DEFLATIONARY MINDSET
     The BOJ has often blamed the stubborn deflationary mindset among households
and businesses for the slow price and wage rises. It is likely to repeat this
factor is still dominant.
     People's deflationary mindset has hampered inflation "more strongly than
expected" and people's price views have been affected by low wages in some
sectors and discounts on retail prices and mobile communications fees, the BOJ
views.
     The BOJ has been saying the momentum toward the 2% inflation target is
"maintained," citing the improving output gap, but the tightening labor supply
and production capacity haven't led to sharp wage and price gains.
     Despite the slow progress, the BOJ is expected to repeat its view that the
price momentum is "maintained."
     The BOJ has said, "In terms of the adaptive component, with the improvement
in the output gap, firms' stances are likely to gradually shift toward raising
wages and prices and the observed inflation rate is expected to rise steadily."
     --MOMENTUM STILL MAINTAINED
     The output gap continues improving in positive territory, meaning that in
theory, pressure on firms to raise retail prices is increasing and upward
pressure on consumer prices will increase with a lag of more than a few
quarters, the BOJ views.
     BOJ officials think various corporate efforts to absorb higher labor and
raw material costs will eventually hit limits but they are not sure when that
will happen.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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