BOJ Minutes: Japan's Inflation Will Exceed Central Bank's Target

The BoJ believes Japan's CPI will exceed its target if companies are compact enough to pass on rising costs to consumers. However, this will take time because it has to change the perception of companies and consumers towards prices.

On Thursday (24/March), the Bank of Japan published the minutes of its January meeting which outlined the problem of inflation. BoJ policy makers agree that consumer inflation could rise to the point of well past the central bank's target if companies pass on rising costs to consumers sooner than expected.

BOJ Minutes: Japan's Inflation Will Exceed Central Bank's Target

One BoJ member predicts that the inflation rate will reach at least 1.5 percent, while another member projects an increase to close to 2.0 percent if companies adjust the increase in the price of production raw materials to the consumer level.

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"Many Japanese companies still adhere to the old way of doing business, namely the deflationary pattern and (even though) when they change the way they set prices, then consumer inflation will certainly increase... We see share prices increase in companies that increase prices, this trend is expected to expand and improve inflation prospects in the medium to long term," said one member of the BoJ policymakers.

The central bank said it would continue to watch wage trends closely. Because with stable wage growth, the movement of the inflation trend according to the target can take place in a sustainable manner.

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"Working wage growth needs to be above 2 percent for Japan to meet the BoJ's inflation target stably… To change the perception of firms and households on price movements, it is important for the central bank to maintain its current ultra-loose monetary easing," said another BoJ member.

Please note, Japan has struggled for a long time to raise the level of consumer inflation. The view of companies that are reluctant to increase prices for fear of losing market share is a factor causing the trend of continuing low inflation. On the other hand, Japanese consumers themselves are very sensitive to rising prices of goods and services.

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USD/JPY Rally Continues

Although the minutes of the BoJ's meeting this morning sounded more optimistic than expected, the BoJ's decision to maintain loose monetary policy did little to help the yen's position against the US dollar. The USD/JPY pair is currently trading around 121.21 or up 0.06 percent from the daily open level. The greenback strengthened sharply against the yen on the monetary policy divergence between the BoJ and the Fed.