MNI POLICY: Long H'hold CPI Expectations To Back BOJ Hikes

The Bank of Japan doubts household medium- to long-term inflation expectations will weaken despite the slowing year-on-year rise in consumer prices, supporting its stance of gradually raising the policy rate, MNI understands.

While officials judge that the recent moderation in inflation, largely driven by government subsidies, could dampen short-term inflation expectations through adaptive inflation formation, they believe households have become accustomed to the relationship between wage increases and price rises, meaning a temporary slowdown in headline CPI is unlikely to sway medium- to long-term expectations.

Should their medium- to long-term inflation expectations weaken, it would undermine the bank’s relatively optimistic assessment of the stickiness of household inflation views and make policymakers more cautious about further rate increases.

Officials are paying particular attention to developments in households’ longer-term expectations, which have historically been more fragile than the firmer and higher inflation expectations held by businesses and professional forecasters. Household inflation expectations are seen as influential in shaping corporate price-setting behaviour.

The BOJ conducts monetary policy with a focus on underlying CPI inflation and households’ longer-term inflation expectations rather than headline CPI alone. Nevertheless, slower actual CPI could appear at odds with ongoing rate hikes and may complicate coordination with the government.

Moreover, measures of underlying inflation that the BOJ monitors have recently eased, testing officials’ optimistic baseline view. Japan’s trimmed mean measure of underlying inflation rose 1.7% y/y in January, slowing from 1.9% in December and remaining below 2% for the second straight month. It has fallen from a recent peak of 2.5% in May 2025. Weighted median also rose 1.7% in January, down from 1.9% in December and 2.5% in May 2025.

REAL WAGES KEY

Inflation-adjusted real wages, a key barometer of household purchasing power, remained in negative territory in December for the 12th consecutive month, slipping 0.1% after a 1.6% fall in November. The data show wages have yet to catch up with inflation, although real wages are likely to turn positive as the year-on-year increase in headline CPI slows.

The key question for policymakers is how consumer prices evolve once government subsidies expire and whether real wages can remain in positive territory thereafter. 

BOJ economists will scrutinise corporate price-setting behaviour, annual price revisions in April and the first wage hike survey results due on March 23 from Rengo, formally known as the Japanese Trade Union Confederation, ahead of the April 27–28 policy meeting, which markets have given a 60% chance of a hike. 

They will also examine firms’ price outlooks and the impact of December’s rate hike on financial conditions in the March Tankan survey, due April 1, as well as reports from the bank’s quarterly branch managers’ meeting in mid-April.