MNI POLICY: BOJ Sees Strong CPGI Supporting Inflation

Strong corporate goods price index data are likely to support a rebound in consumer price inflation in the coming months, reinforcing the case for a near-term policy rate hike, while the recent slowdown in CPI growth has likely not altered the Bank of Japan's inflation outlook, MNI understands.

The pace of business-to-business pass-through of higher costs has accelerated and become more sustained, as firms are increasingly able to pass rising labour and material costs on to selling prices, with elevated crude oil prices and labour costs making it easier to gain public acceptance for price increases.

CGPI rose 4.9% y/y in April, while the import price index on a yen basis surged 17.5%. Officials are now focused on the May data, due Wednesday, for further evidence that firms continue to pass on higher costs.

Bank officials believe private consumption remains on a moderate upward trend despite continued high prices, with the Bank's consumption activity index rising 1.6% m/m in April following a 0.4% decline in March. However, they are mindful that a rebound in CPI could weigh on private consumption if inflation outpaces wage growth, impacting real wages.

Bank officials see no need to alter their inflation outlook because of the recent moderation in CPI, which they partly attribute to the timing of corporate price revisions in April, and do not believe it will complicate consideration of a policy rate increase next week, with markets pricing a 93% probability of a 25-basis-point hike to 0.75%. Businesses will also raise prices again this month, August and October. 

The BOJ raised its core CPI forecast for the current fiscal year to 2.8% in April from 1.9% projected in January, based on the assumption of stronger corporate pass-through of higher costs. However, recent CPI developments have not fully matched the strength implied by those upward revisions. The year-on-year increase in headline CPI slowed to 1.4% in April from 1.5% in March and 2.1% in December 2025, after registering 1.3% in February.

INFLATION EXPECTATIONS

Officials are focused on whether slower CPI growth could dampen medium- to long-term inflation expectations, in addition to any impact on short-term inflation expectations. 

The BOJ believes the continuing conflict in the Middle East is keeping crude oil prices elevated and helping to prevent medium- to long-term inflation expectations from falling, with the prices of everyday goods and services having a greater influence on households' inflation expectations than official CPI data, according to officials.

They are also examining how the recent slowdown in CPI growth has affected household expectations ahead of the Bank's quarterly consumer sentiment survey due in mid-July, with a focus also on whether firms' expectations and selling-price outlook remain firm in the June Tankan survey, due on July 1.