MNI POLICY: BOJ's Renewed Price Focus Improves Hike Conditions

The Bank of Japan is increasingly vigilant about second-round effects from yen weakness and crude oil prices, particularly the risk of rising inflation expectations, with conditions for a rate hike gradually falling into place and raising the possibility of a move as early as next week, MNI understands.

While it remains uncertain whether the Bank will raise the policy rate at the upcoming meeting — with markets currently seeing only about a 6% chance — the possibility of a hike next week will remain under consideration as concern over a sustained rise in crude oil prices and continued yen weakness grows among policymakers. In that case, officials would seek to gather sufficient information ahead of the meeting to justify a rate increase.

Still, with uncertainty surrounding crude oil prices, the dollar-yen exchange rate and the duration of the Middle East conflict, alongside fragile stock markets, the Bank could adopt a wait-and-see stance until the April 27–28 meeting, for which markets currently assign a 55% chance of a rate hike. The BOJ could also choose to monitor developments in oil prices and the dollar-yen rate until the April meeting, when more economic data and information on the impact of higher oil prices will become available, although new risks could emerge in the meantime.

Medium- to long-term inflation expectations are not yet anchored at 2%, suggesting they could move either higher or lower depending on firms’ and households’ perceptions of crude oil prices and wages. MNI reported this week that the bank will likely maintain its current risk assessment next week and update it at the April meeting. (See MNI POLICY: BOJ To Check Main Scenario, Risk Balance In April)

PRICE FOCUS

While the BOJ does not dismiss downside risks to the economy — as weaker growth could reduce corporate profits, undermine the basis for wage hikes and widen the output gap, potentially raising the risk of a return to deflation — the board’s final decision will depend on whether the greater risk lies in addressing upside price pressures. Officials will pay close attention to corporate price revisions in or after April, both to gauge the strength of firms’ price-setting following wage increases and to assess the risk of inflation expectations overshooting. 

In the past, the BOJ focused on downside risks to the economy when faced with yen weakness, as wages were stagnant and firms were reluctant to raise retail prices. However, the economic environment has changed considerably, making it easier for inflation expectations to rise.

Wages have increased for three consecutive years and major firms plan to raise wages this year by roughly the same amount as in 2025. Core CPI has also remained above 2% for 46 months, while corporate price-setting remains firm.

With firms’ behaviour increasingly shifting toward raising wages and prices, exchange-rate movements are now more likely than in the past to affect prices and influence underlying CPI through changes in inflation expectations, the BOJ warned. Major firms’ solid wage hikes this year are largely based on last year’s high consumer prices, and the BOJ assesses that these increases also reflect firms’ forward-looking expectations that prices will continue rising.