TOKYO (Reuters) -Pressure is mounting within the Bank of Japan to ditch a vaguely defined gauge of inflation as worries about second-round price effects prompt some board members to call for a more hawkish communication of policy and a clearer path to future rate hikes.
BOJ Governor Kazuo Ueda has justified going slow on rate hikes by explaining that "underlying inflation," which focuses on the strength of domestic demand and wages, remains short of the central bank's 2% target.
The trouble is that there is no single indicator that gauges "underlying inflation", making it a target for critics who say the BOJ is overly reliant on an obscure reading to guide monetary policy despite both headline inflation and core measures exceeding its target for years.
Now, even some members of the BOJ board - worried that second-round price effects were becoming embedded in pricing behaviour and public perceptions of future inflation - are calling for a change to the bank's communication to a more hawkish one that focuses on headline inflation, which hit 3.3% in June.
"We're at a phase where we should shift the core of our communication away from underlying inflation to actual price moves and their outlook, as well as the output gap and inflation expectations," one member said, according to a summary of opinions at the bank's July policy meeting.
Another member said the BOJ must put more emphasis on upside risks to prices, and consider tweaking its communication to one that is based on the view Japan will hit 2% inflation.
Some members of the government's top economic council also warned this month the BOJ might be too complacent of mounting price pressure, a clear nudge to the central bank to steer a more hawkish policy path in the wake of growing public alarm over persistent inflation.
"I'm worried that monetary policy is already behind the curve," one panel member was quoted as saying at a meeting last week, adding that prolonged price rises were already affecting people's livelihood and their inflation expectations.
OCTOBER POLICY TILT?
The BOJ exited a decade-long, radical stimulus programme last year and raised short-term interest rates to 0.5% in January on the view that Japan was on the cusp of sustainably hitting its 2% inflation target.
While the central bank has signalled its readiness to raise rates further, the economic impact of higher U.S. tariffs forced it to cut its growth forecasts in May and complicated decisions around the timing of the next rate increase.