MNI POLICY: Risk Of Weaker Inflation Expectations Concern BOJ

Bank of Japan officials are monitoring risks that households’ inflation expectations could weaken as food-price rises ease and some firms lower retail prices, MNI understands, though high living costs and wage hikes are still seen as supporting underlying inflation.

If households’ inflation expectations slip, it will dampen corporate price-setting and threaten the sustainability of the wage-price cycle, even as private consumption remains weak under negative real wages. 

Officials are watching closely whether price cuts in restaurants spread, while expecting labour shortages to keep wage hikes on trend despite pressure on corporate profits from U.S. trade policies.

A Ministry of Finance survey showed manufacturers’ profits fell 11.5% y/y in Q2, and if this decline deepens in Q3, officials fear it would weigh on firms’ ability to raise wages. They are also monitoring regular price revisions from October and consumers’ response.

These concerns over expectations come as the BOJ is expected to keep underlying CPI inflation as its key gauge for policy, allowing it to move cautiously on rate hikes and making a further hike this year increasingly unlikely, MNI understands. (See MNI POLICY: Underlying Inflation Key For BOJ's Slow Hikes) The BOJ expects underlying CPI inflation to slow temporarily due to weaker economic momentum but maintains its view that it will gradually rise, supported by growing labour shortages as the economy strengthens.

Deputy Governor Ryozo Himino warned this week that trade policy shocks could moderate growth and exert downward pressure on prices and wages. Exporters may reduce prices to offset tariffs, risking a return to cost-cutting behaviour that would stall the emerging wage-price cycle, he said.