Japan’s Deeper Inflation Trend to Keep BOJ on Edge Over Prices

Japan’s core consumer inflation slowed in July in line with the central bank’s view that upward pressure on prices is easing, but pockets of sticky price growth will keep monetary authorities on alert to upside risks.

(Bloomberg) — Japan’s core consumer inflation slowed in July in line with the central bank’s view that upward pressure on prices is easing, but pockets of sticky price growth will keep monetary authorities on alert to upside risks.

Consumer prices excluding fresh food rose 3.1% from a year ago, decelerating from 3.3% in the previous month, the internal affairs ministry reported Friday. The figure matched analysts’ expectations.

The nationwide result was consistent with data for Tokyo, a leading indicator that earlier showed a modest slowdown as falls in energy prices deepened.

Still, prices excluding energy and fresh food increased 4.3% from the previous year, accelerating from the pace in June and matching the record set in May, which was the fastest since 1981. That underscores the strength of the deeper inflation trend.

“The core inflation certainly came down, but if you look at the content, you see how sticky inflation remains,” said Nobuyasu Atago, chief economist at Ichiyoshi Securities and a former BOJ official. “Food prices were stronger than I had expected and have an impact on how people feel about prices. The data confirmed once again that inflation is stickier than the BOJ and market think.”

Among factors contributing to hotter inflation was the 9.2% gain in prices for processed foods. That pace of increase, unchanged from June, was the fastest in about five decades. More than 7,300 food items are still expected to see price hikes from August and beyond, according to a report by Teikoku Databank.

Price gains for household durable goods slowed to 6%, while the cost of lodging accelerated to 15% after the government cut back on travel subsidies just as leisure demand surges in Japan’s first post-Covid summer. 

Another closely watched category in the data showed service price growth accelerating to 2% from 1.6%, an indication that inflation is spreading more widely within the economy. That was the biggest increase since 1993, excluding the year following a 1997 sales tax hike.

What Bloomberg Economics Says…

“Beneath Japan’s cooler July core CPI, hotter demand for recreation services is starting to underpin inflation. This will keep the Bank of Japan alert to upside risks to the price outlook.”

— Taro Kimura, economist

For the full report, click here. 

In its latest Outlook report, the Bank of Japan raised its price growth forecast for this fiscal year to 2.5% after inflation proved stickier than expected in recent months. But officials continued to see inflation slowing below 2% in the coming years, underscoring their view that upward price pressure will keep weakening in coming months.

Friday’s result may temper market speculation that the BOJ might consider a shift away from its ultra-easy monetary stance toward the end of the year. Such notions got a boost after Governor Kazuo Ueda jolted markets last month by modifying the bank’s control of bond yields. Ueda emphasized after the meeting that the policy tweak wasn’t meant to be a step toward normalization but rather a move to make its stimulus more sustainable.

Many uncertainties surround the outlook for Japan’s prices, including the status of government measures aimed at easing the impact of higher costs on households and businesses. Parts of the program, including subsidies for utilities, are set to expire at the end of September. 

These subsidies for electricity and gas helped lower the overall inflation rate by 0.99 percentage point, the ministry said.

If the government ends subsidies for gasoline and kerosene, core CPI would be pushed up by an additional 0.5 percentage point, according to Dai-ichi Life Institute’s economist Yoshiki Shinke.

The government will reportedly decide by the end of the month whether to extend the subsidies. That could influence the support of Prime Minister Fumio Kishida, whose approval rating has been languishing in recent polls.

Energy prices have fallen significantly from a year ago. Brent averaged about $80 a barrel in July, down from around $105 a barrel in the same period last year, while natural gas prices are down about 34% since the start of the year.

The main inflation indicator has remained above the BOJ’s 2% target for over a year, creating a drag on consumer sentiment as persistent inflation reduces the impact of robust wage growth. Even after the notable pay gain agreed during this year’s annual wage negotiations, real wages continue to stagnate in negative territory.

The impact of payrolls failing to keep up with inflation has weakened consumer purchasing power. While gross domestic product figures for the last quarter showed strong external demand driving a surprising annualized growth rate of 6%, the data also indicated weakness in business and private spending.

Japan’s overall inflation rate is already a tad higher than the comparative rate in the US, where the Federal Reserve continues to mull further tightening due to concerns about price gains. At the other end of the spectrum is China, where consumer prices dropped in July, raising the specter of deflation.

(Adds economists’ comments, details from the report)

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