Japan households' inflation expectations heighten as wage hikes broaden, surveys show

By Leika Kihara and Makiko Yamazaki

TOKYO (Reuters) -Nearly 90% of Japanese households expect prices to rise a year from now, a quarterly central bank survey showed on Friday, a sign of heightening inflation expectations that could help make the case for a near-term interest rate hike.

A separate survey showed momentum for wage hikes was broadening among small- and medium-sized firms in regional areas, signalling that Japan was making progress toward durably achieving its 2% inflation target - a prerequisite for raising interest rates.

The Bank of Japan (BOJ) will decide on whether to raise current near-zero interest rates at its policy meeting on July 30-31.

Of the total households surveyed by the BOJ, 87.5% of households said they expect prices to rise a year from now, up from 83.3% in previous survey in March and marking the highest level in 16 years.

The survey also showed 82.0% of the respondents expect prices to rise five years from now, higher than 80.6% three months ago.

"A growing number of firms in the services industry are passing on rising costs, or considering doing so," the BOJ said in a separate survey on small regional firms.

"Some firms are starting to signal that they will keep passing on rising costs to retain stable source of revenues to continue hiking pay," according to the survey.

The BOJ ended negative interest rates in March on the view that sustained achievement of its 2% inflation target has come into sight. Governor Kazuo Ueda has signalled the chance of more hikes if underlying inflation heads toward 2%, as it projects.

Ueda has also said wage hikes must broaden to smaller firms, and prod companies to pass on rising labour costs, before the BOJ can consider hiking rates again.

Japan's core inflation remains above the BOJ's 2% target for more than two years and is expected to hit 2.7% in June, according to a Reuters poll, accelerating from 2.5% in May.

Companies' long-term inflation expectations are also converging towards the BOJ's 2% target. A survey earlier this month showed Japanese firms expect inflation to hit 2.3% three years from now and 2.2% five years ahead.

Many market players expect the BOJ to hike rates this year, though they are divided on whether it will happen this month.

Soft consumption could emerge as a factor that discourages the BOJ to raise rates too soon, some analysts said.

Friday's quarterly BOJ survey showed households were more pessimistic about current economic conditions compared with three months before, boding ill for the outlook on consumption.

An index gauging the ratio of households who are optimistic about the economy versus those who are pessimistic stood at -49.8 in June, worse than -36.1% in March, the survey showed.

(Reporting by Leika Kihara and Makiko Yamazaki; additional reporting by Tetsushi Kajimoto; Editing by Muralikumar Anantharaman, Christopher Cushing, Raju Gopalakrishnan and Sherry Jacob-Phillips)