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BOJ may raise price outlook but keep ultra-loose policy

TOKYO (CNA) – The Bank of Japan (BOJ) is expected to upgrade its price forecast next week as the impact of higher raw material costs trickles down to consumers, but stress its resolve to keep monetary policy ultra-loose with inflation well below its two per cent target.

The central bank will flag risks from a recent spike in Omicron coronavirus cases but will likely maintain the view that the world’s third-largest economy is headed for a moderate recovery from last year’s pandemic-induced slump.

The BOJ is widely expected to maintain its short-term interest rate target at -0.1 per cent and that for 10-year bond yields around zero per cent, at its two-day policy review ending next Tuesday.

“The BOJ could upgrade its price forecast but will still project inflation to remain around 1.5 per cent in fiscal 2023,” analysts at SMBC Nikko Securities wrote in a research note.

“That means a tweak to the BOJ’s rate policy is off the cards this year.”

Contrary to its United States (US) counterpart struggling with surging inflation, the BOJ’s focus so far has been to prevent a return to deflation as weak household spending and wage growth keep consumer inflation stuck around zero.

But recent signs of change in corporate price-setting behaviour have spurred debate among policymakers on whether they should brace for the possibility of an inflation overshoot this year.

Corporate and household inflation expectations have risen to multi-year highs, as a record spike in wholesale inflation led more firms to pass on rising costs to consumers.

The BOJ’s “tankan” business survey showed an increase in the number of firms seeing retail prices rise. Consumers are charged more for goods ranging from gasoline to flour and cooking oil.

In a quarterly report to be released after the meeting, the BOJ is likely to raise its inflation forecast for the year beginning in April, sources have told a news agency.

Compared with its assessment in October, the latest report may emphasise rising inflationary pressure and a shift in the balance of risk on the price outlook, the sources said.

But many BOJ policymakers may prefer to wait for a further rise in wages to conclude that the expected up-tick in inflation, driven mostly by rising energy costs, will be sustainable, they said.

Governor Haruhiko Kuroda is thus likely to stress that monetary conditions will remain ultra-loose in Japan, even as the US Federal Reserve has flagged several rate hikes this year.