MNI POLICY: BOJ's Concerns Grow Over Slowing Price Hikes

Bank of Japan officials are watching for signs that some businesses are struggling to pass on cost pressures to selling prices as consumer spending lacks momentum amid persistent high prices and negative real wages, a development that could further complicate the central bank’s efforts to normalise policy smoothly, MNI understands.

Officials are monitoring the risk that retreating corporate price-setting behaviour could undermine the mechanism in which wages and prices rise in tandem – a dynamic central to the BOJ’s strategy for achieving sustainable inflation and advancing policy normalisation.

The current weak yen is also adding pressure, as higher import costs are squeezing profits at non-manufacturers unable to fully pass on increased labour and distribution costs to selling prices. While BOJ officials do not expect private consumption to deteriorate sharply in the near term, they judge that household spending remains sluggish as real-wage growth continues to lag inflation.

Markets doubt the BOJ will raise its 0.5% policy rate at the Oct. 30 meeting, pricing in a 42% chance of a hike at the Dec. 19 session, with a 0.75% rate not fully expected until at least April. 

MNI reported last week that the BOJ is likely to maintain its “no rush” stance, despite the weakening yen. (See MNI POLICY: Yen Fall Unlikely To Drive Swift Japanese Action)

SLUGGISH CONSUMPTION

In July, the BOJ downgraded its assessment of private consumption, saying it “has been resilient,” from the previous view that it “has maintained its moderate increasing trend.” The BOJ’s Consumption Activity Index also fell 0.4% m/m in August, marking a second straight decline after a 0.5% drop in July, with both durable and non-durable goods consumption weakening. 

Meanwhile, branch managers have reported increasingly cautious corporate sentiment, noting that consumers remain highly sensitive to price changes and that further increases risk dampening spending.

Although BOJ officials maintain that the momentum for wage hikes remains intact – supported by persistent labour shortages and elevated prices – they expect the size of pay rises in fiscal 2026 to fall short of this year’s levels. Smaller wage increases could worsen household sentiment and further curb consumption, officials warn. The BOJ is also paying close attention to comments from corporate executives about next year’s wage plans, particularly after profit results become available toward year-end to assess the likelihood of sustained wage growth.

Governor Kazuo Ueda cautioned on Oct. 3 that if prolonged food price increases lead to a deterioration in household sentiment, “this could dampen private consumption and act to push down inflation.”