MNI POLICY: BOJ Sees Risk Stronger Wages Fuel Faster Hikes

Stronger wage and inflation results will challenge the Bank of Japan's cautious stance on the 0.75% policy rate and trigger a reassessment of its view that hikes are not needed at intervals shorter than six months in 2026 or that larger increases are unnecessary, with particular focus on base pay in trade union confederation Rengo’s first wage survey due in mid-March.

Officials are confident in the initial momentum for wage hikes, assuming base pay growth for fiscal 2026 comes in within plus or minus 0.5 percentage points of the 3.84% increase seen in Rengo’s comparable survey last year.

Should base pay growth for fiscal 2026 match the 2025 level, officials would likely judge wage momentum to be stronger, as inflation is expected to slow from fiscal 2025 levels, which would support faster hikes. 

Markets currently assign a 41% chance of a further 25-basis-point increase at the April meeting and see the policy rate at 1.217% by December, with each meeting after April through the remainder of the year carrying roughly a 25% probability of a rate hike. 

However, a base pay increase below 3% would undermine the foundation for wage growth envisioned by officials, making it difficult for the BOJ to consider a policy rate hike in April. 

CPI FOCUS

Meanwhile, if inflation in the first quarter of fiscal 2026 does not slow as much as projected in October – the BOJ has forecast core CPI to fall below 2% in the first half of fiscal 2026 – officials would likely reassess their view of easing price pressures. Such an outcome could also lift households’ inflation expectations and increase the risk that the BOJ falls behind the curve, a scenario officials maintain is still highly unlikely. 

Officials will also monitor corporate price revisions expected in or after April, as sluggish private consumption and price cuts in the food service industry could limit firms’ ability to raise retail prices.

While a decline in food prices may lower households’ short-term inflation expectations, officials are more focused on whether medium- to long-term inflation expectations remain anchored.

Tokyo-area headline, core and core-core CPI for December fell both year-on-year and month-on-month, while nationwide December CPI is due on Friday alongside the Board's first policy-rate decision of 2026. (See MNI BOJ WATCH: Board To Hold, Raise Growth Projection)

The BOJ must also gauge how the higher policy rate has affected the economy and financial conditions before moving on further hikes. Officials note that borrowing costs hit different sectors with a lag but expect capital expenditure and housing investment to respond relatively quickly. They are also watching for a rise in bankruptcies, particularly among real estate firms, smaller companies, and food-service businesses.