by Leika Kihara

TOKYO (Reuters) – Bank of Japan Governor Kazuo Ueda said on Friday he was seeing changes in corporate pricing behavior that could lead to a bigger-than-expected rise in inflation, giving to think that Japan is on track to sustainably achieve the 2% inflation target.

Kazuo Ueda, however, reaffirmed the central bank’s determination to maintain an ultra-accommodative policy, in order to ensure that companies raise wages enough to compensate for the increase in inflation suffered by households.

“There is still a long way to go to achieve our inflation target of 2% in a sustainable and stable manner. This is why we will patiently maintain our policy of monetary easing”, he declared before the Parliament.

By maintaining a policy of supporting the economy, the central bank wants to create a virtuous circle in which inflation-adjusted wages begin to take off, he added.

The BoJ, which meets next week, is expected to opt for the status quo on its current ultra-accommodative policy as the economic recovery is seen as still fragile to sustainably hit the price target, sources told Reuters.

Japan’s core inflation, as measured by consumer prices (CPI), hit 3.4% in April, beating the BoJ’s target as companies continued to pass on higher commodity costs on households.

According to Kazuo Ueda, however, the BoJ expects core inflation (core CPI) to fall below 2% in the second half of the current fiscal year.

“However, there are several uncertainties regarding the outlook for inflation. What is important is the behavior of companies in terms of pricing, it is somewhat above expectations,” he said.

Real wages, adjusted for inflation, fell by 3.0% in April, the 13th consecutive month of decline, a sign that the rise in the cost of living is eating into household purchasing power.

According to the think tank Teiko Data Bank, the average amount of bonuses planned for this summer should however increase by 2.4% this year over one year, a positive development for consumption.

However, it is not certain that companies will continue to raise wages after reaching an agreement with the unions on increases to levels not seen in 30 years.

The Japanese economy recorded annualized growth of 2.7% in the first quarter thanks in particular to solid investment spending.

With inflation currently above the BoJ’s target, markets are speculating on a gradual withdrawal of stimulus measures, with Japan being one of the few developed countries not to have taken the restrictive bias adopted in Europe and in North America.

(Reportage Leika Kihara; Claude Chendjou, edited by Kate Entringer)

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