By Leika Kihara

TOKYO, Reuters – A sign that global price pressures have prompted even the most dovish central banks to reconsider their neutral policy stance is the Bank of Japan dropping hints about the recent increase in inflation.

This contrasts with BOJ’s traditional view that low consumption and Japan’s deflationary mentality will prevent inflation from rising.

Although the BOJ is likely to remain far behind other countries in the race for higher interest rates globally, the BOJ may be able to change its tone if it sees the need to.

One source said that Japan could move towards the type of inflation environment the central bank finds desirable starting next fiscal year. Another source added that the BOJ theoretically can adjust its yield targets prior to inflation stabilizing above 2%.

According to another source, Japan’s underpinning price trend remains fairly stable, but it is important to determine if wages and services prices rise more.” Another source also stated the same thing, which was also shared by a third source.

Russia’s incursion in Ukraine has driven up commodities prices. More lockdowns in China to reduce COVID cases have made supply chain issues worse. This has prompted a number of central banks to raise interest rates to curb inflation.

Last month, the BOJ demonstrated its determination to be an exception by reaffirming its pledge to maintain ultra-low rates. Governor Haruhikokuroda said that there is no immediate chance for tightening the policy and called recent price rises temporary.

Kuroda cited the latest bank forecast, which showed that core consumer inflation, which also includes energy cost impact, will fall to 1.1% by fiscal 2023/2024. It had been 1.9% in 2018.

A closer inspection of the BOJ’s Outlook Report, published last month, shows its growing belief that Japan could see a steady increase in inflation, even though the cost-push effect has tapered off.

The BOJ has updated its forecasts to show that core-core consumer inflation, which takes out the effects of fuel cost, will accelerate to 1.2% and 1.5% respectively in fiscal 2023, from 0.9% this year.

According to the report, strong demand is replacing cost pressures and will drive price rises. This will lead to wage inflation, which will cause households more comfortable with price increases than in the past.

The BOJ stated that inflation expectations have increased, especially in the short term, and revised its position from January.

The medium- and longer-term inflation expectations for the future are expected to rise further, and it “bring about an even wider range of prices increases including services,” it stated.

To adjust policy, the BOJ stated that any increase in inflation should be accompanied with strong wage growth.

The BOJ policy meeting minutes showed that policymakers were more aware of rising inflationary pressure.

According to one member, “Japan’s inflationary cycle of the 1970s saw the greatest rise in consumer prices among advanced countries,” he stated at March policy meeting.

According to sources, Japan’s economy remains below its pre-pandemic level and the BOJ doesn’t see the need for any significant adjustments to its yield curve control policies (YCC).

Analysts say that the BOJ’s increasing focus on inflation risk will keep market speculation alive about a tweak to YCC in advance of next year’s leadership transition which will see Kuroda leave.

Japan’s inflation will remain at 2% for some time. Mari Iwashita (chief market economist, Daiwa Securities) said that this would pose questions about whether the BOJ can stand still.

Iwashita is a long-time BOJ observer. “The outlook report’s bullish price perspective may be the BOJ’s attempt to set the foundation for future policy tweaks,” he said.