MNI POLICY: BOJ Sees Risk Slowing Consumption Endangers Hikes

Bank of Japan officials are increasingly concerned by the risk that private consumption is losing momentum after a period of relative outperformance, as corporate profits are squeezed by U.S. tariffs, making it harder to increase interest rates, MNI understands.

The Consumption Activity Index fell 0.3% m/m in May for a third straight month, as rising food prices hit non-durable goods spending, eroding a key support for hopes of sustainably achieving the BOJ’s 2% inflation target after a period of surprisingly robust data even as businesses transferred higher labour and materials costs to retail prices.

Spending linked to services has continued to rise, but U.S. tariffs threaten to eat into major manufacturers’ profits, further compressing real wages and consumption, officials consider. June’s Tankan saw downward revisions to corporate profit expectations, and the September and December editions of the survey will be closely watched by officials for their implications for winter bonuses and wage hikes next year. (See MNI INTERVIEW: BOJ At Crucial Point; Zero Rate Return Possible)

So far, officials have expected to further hike the 0.5% policy rate by the end of the year or early in 2026, though they are set to reaffirm downside risks to the economy and prices outlined in the May 1 Outlook Report at the BOJ’s July 30-31 meeting. (See MNI POLICY: BOJ To Reaffirm Downside Risks, Up FY25 Inflation)

Household spending has been supported by slowing inflation, though recent CPI data has been stronger than expected, and by government subsidies last year, with new subsidies potentially in the offing ahead of July’s upper house elections. Increasing labour shortages have also bolstered wages, as well as a rise in inflation, which tends to be the basis for Japanese pay awards.