Bank of Japan may face a tough choice if costs weigh on household spending

what happened

Japan's inflation remains a concern, even though the figures look less worrying than the annual rates imply. State Street Investment Management economist Krishna Bhimavarapu, as reported by Market Talk, notes that September's CPI data showed firms passing costs to prices more effectively, with food inflation easing as the rice price spike fades.

Yet rising prices in areas such as dining out suggest businesses are still shifting costs onto consumers. The economist worries that better pass-through for companies may be coming at the expense of household spending, as consumers grow more cautious.

The Bank of Japan is caught between two forces: persistent inflation supports further policy normalization, while softer domestic demand argues against rushing the next rate hike.

why it matters

For markets, this points to a cautious Bank of Japan at its next rate decision. A slower pace of tightening typically weighs on the yen and affects Japanese government bond yields, which keeps the USD/JPY pair sensitive to comments like these.

market impact

Yen and JGBs: signs of slower BoJ tightening can weigh on the yen

tags

instruments