BOJ Sees Few Signs of Wage-Price Spiral, Minutes Show

By Mayumi Otsuma

Aug. 22 (Bloomberg) -- Bank of Japan board members said there are few signs that rising commodity prices will prompt companies to increase wages and fan inflation, minutes show.

``Many members said that wages had not risen markedly in Japan and to date there had been no sign of second-round effects from the rise in prices of petroleum products and food,'' the minutes of the July 14-15 meeting released today in Tokyo said.

Rising fuel and food costs are sapping corporate profits and household income, putting a strain on an economy that may already be in a recession. The bank this week described growth as ``sluggish'' for the first time in a decade, indicating it won't raise the key interest rate from 0.5 percent anytime soon.

``The BOJ is more concerned about growth than inflation as it becomes clearer that Japan is in a recession,'' said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo. ``The monetary policy gridlock will continue for a while.''

The yen traded at 108.98 per dollar as of 12:39 p.m. in Tokyo from 108.48 before the minutes were published.

Japan's inflation is outstripping gains in wages. Consumer prices excluding fresh fruit, fish and vegetables climbed 1.9 percent in June from a year earlier, the fastest pace in a decade. Average paychecks increased 0.4 percent.

`Restraining Wages'

Companies will probably keep ``restraining wages for the time being'' because profits are declining, some of the policy board's seven members said at the July meeting.

Central bank Governor Masaaki Shirakawa said this week that inflation isn't spreading because ``the pace of wage increases is weak.'' He said the economy's recovery may be delayed because of the rise in food and fuel costs and weakening exports.

Minutes published from other central banks this week show the difficulties policy makers are facing as economic growth slows and inflation accelerates.

The Bank of England was split three ways in August, with one member arguing for higher rates to tame prices and another voting for a cut to stave off a recession. Australia's central bank said it may soon cut rates for the first time in seven years to avoid a deeper slowdown, after increasing borrowing costs to a 12-year high of 7.25 percent in March to quell inflation.

Japan's economy, the world's second largest, shrank at an annual 2.4 percent pace in the three months ended June 30. Economists surveyed say the nation will grow an annualized 0.6 percent this quarter and some predict a second contraction.

May `Shrink Again'

The economy may ``shrink again in the current quarter and that would mark a technical recession,'' said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. ``For the reminder of the year, the BOJ's expected to be on hold.''

Still, the Bank of Japan also said this week that the economy should eventually resume expanding as global prices ease and overseas economies recover.

Some board members said the bank should be wary that keeping rates low for a long time could overstimulate the economy once growth picks up, according to the minutes.

Japan has kept the key rate, the lowest among major economies, unchanged since doubling it to 0.5 percent in February 2007. The U.S. Federal Reserve's benchmark is 2 percent and the European Central Bank raised its rate to 4.25 percent this month.

The central bank began releasing the minutes sooner than previously this month as part of measures announced in July to improve policy transparency. Minutes are now published after they are approved by the board members at the next meeting. Previously, they were sometimes approved two meetings later.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net