BOJ May Shift to Aggressive Inflation Fighting Posture by December

Japan's economy is bracing for another wave of inflation, according to Tsutomu Watanabe, an emeritus economics professor at the University of Tokyo. The third wave will be triggered by a Middle East conflict and may reach its peak near 3 per cent in March next year, before slowing towards the Bank of Japan's (BOJ) 2 per cent target.

Watanabe predicts that underlying inflation is already rising and could overshoot to 2.2 per cent around July next year if the BOJ maintains its current slow pace of rate hikes. This would be 'pretty problematic' and may force the BOJ to raise rates aggressively, which it wants to avoid.

Watanabe suggests that the BOJ will shift from a 'passive' approach tolerant of price rises to an 'active' one focusing on combating inflation as soon as December next year. The key factor in this timing will be next year's wage outlook, with uncertainty over the Middle East conflict potentially holding back pay increases.

Under the new regime, Watanabe expects the BOJ to raise rates at a pace of once every quarter rather than its current speed of roughly twice a year.