Analysis:BOJ faces pressure to ditch obscure inflation gauge, clear path to tighter policy

CNA

a day ago

TOKYO :Pressure is mounting within the Bank of Japan to ditch a vaguely defined gauge of inflation as worries about second-round price effects prompt some board members to call for a more hawkish communication of policy and a clearer path to future rate hikes.
BOJ Governor Kazuo Ueda has justified going slow on rate hikes by explaining that "underlying inflation," which focuses on the strength of domestic demand and wages, remains short of the central bank's 2 per cent target.
The trouble is that there is no single indicator that gauges "underlying inflation", making it a target for critics who say the BOJ is overly reliant on an obscure reading to guide monetary policy despite both headline inflation and core measures exceeding its target for years.
Now, even some members of the BOJ board - worried that second-round price effects were becoming embedded in pricing behaviour and public perceptions of future inflation - are calling for a change to the bank's communication to a more hawkish one that focuses on headline inflation, which hit 3.3 per cent in June.
"We're at a phase where we should shift the core of our communication away from underlying inflation to actual price moves and their outlook, as well as the output gap and inflation expectations," one member said, according to a summary of opinions at the bank's July policy meeting.
Another member said the BOJ must put more emphasis on upside risks to prices, and consider tweaking its communication to one that is based on the view Japan will hit 2 per cent inflation.
Some members of the government's top economic council also warned this month the BOJ might be too complacent of mounting price pressure, a clear nudge to the central bank to steer a more hawkish policy path in the wake of growing public alarm over persistent inflation.
"I'm worried that monetary policy is already behind the curve," one panel member was quoted as saying at a meeting last week, adding that prolonged price rises were already affecting people's livelihood and their inflation expectations.
OCTOBER POLICY TILT?
The BOJ exited a decade-long, radical stimulus programme last year and raised short-term interest rates to 0.5 per cent in January on the view that Japan was on the cusp of sustainably hitting its 2 per cent inflation target.
While the central bank has signalled its readiness to raise rates further, the economic impact of higher U.S. tariffs forced it to cut its growth forecasts in May and complicated decisions around the timing of the next rate increase.
With Japan having agreed on a trade deal with the U.S. in July, the BOJ has shed some of its gloom over the economic outlook.
Of the BOJ's nine board members, Naoki Tamura, Hajime Takata and Junko Koeda have highlighted the risk of persistent rises in food prices leading to broader-based, sustained inflation.
To be sure, there is no consensus within the board yet on whether a communication overhaul is needed, with one member quoted as saying in the summary that underlying inflation remained an "important concept in guiding policy."
But the fact some members openly called for a tweak to the dovish communication highlights the board's growing attention to broadening inflationary pressure that may pave the way for rate hikes in coming months and into 2026, some analysts say.
Annual core consumer inflation hit 3.3 per cent in June, exceeding the BOJ's 2 per cent target for well over three years, due largely to a 8.2 per cent spike in food costs.
Such price pressures led the board to revise up its core inflation estimates last month, and cast doubt on the BOJ's view that underlying inflation - measured by a mix of proxies such as public expectations of future price moves - has yet to reach 2 per cent.
The BOJ may gradually phase out the concept of underlying inflation from its communication, as it gears up for the next rate hike that could happen as soon as in October, said veteran BOJ watcher Naomi Muruguma.
"I think many BOJ officials are beginning to realise that the idea doesn't fit quite well with reality," she said. "We might hear less of this concept when the timing of the next rate hike draws near."