The pace of Japan’s consumer inflation stayed well above the Bank of Japan’s (BOJ) 2% target even as price growth moderated, supporting market speculation that the central bank will hike its benchmark interest rate again this year.Consumer prices excluding fresh food rose 3.1% from a year earlier in July, slowing from a 3.3% gain in the previous month, the Ministry of Internal Affairs and Communications reported Friday. The median estimate of economists was for the core CPI gauge to gain 3%, with expectations that there would be a drag from energy prices after they spiked a year earlier.A deeper price measure that also strips out energy advanced 3.4%, unchanged from the previous period and matching the consensus estimate in a sign of underlying inflation momentum.
“It’s wrong to conclude that inflation is weakening just because core CPI eased,” said Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute. “Food prices are still accelerating, reflecting a willingness among businesses to pass their costs on to consumers, and compared with expectations a few months ago, inflation is running higher than forecast.”Also Read | RBI releases discussion paper on policy framework; seeks views on retaining 4% CPI targetFriday’s data came about a week after US Treasury Secretary Scott Bessent took the unusual step of suggesting the BOJ is mishandling its fight against inflation, saying in an interview with Bloomberg TV that “they’re behind the curve.” Market bets on a BOJ hike have ramped up in recent weeks, helping push bond yields higher.The leading factor behind the slowdown in July was energy prices, which fell 0.3%, the first decline since March 2024. That development was largely expected after energy costs jumped 12 months ago due to the end of the government’s subsidy program. Also, oil prices in the market were down by about 10% last month compared with levels a year ago.What Bloomberg Economics Says…
“Beneath the surface, price pressures remain sticky. Earlier spikes in rice prices and rising labour expenses are still feeding through into processed food, keeping the core-core gauge running hot in the mid-3% range. For the BOJ, the data support a gradual path of rate hikes.”The price of rice, a primary driver of inflation this year, rose 90.7% from 12 months ago, with the increase moderating from 100.2% in June. The skyrocketing cost of the staple food has caused consternation across the nation. Hopes that prices might moderate could be upended by record high temperatures, which threaten to curb production and cause new shortages.Prices for processed food rose 8.3%, the fastest pace since September 2023, while service prices rose 1.5%, the same pace as in the previous month.The public’s deep discontent over soaring costs of living played a key role in handing Prime Minister Shigeru Ishiba and his ruling coalition a historic setback in an election last month. Having lost majorities in both chambers of parliament, the premier now faces demands to resign from some lawmakers. Analysts are watching to see if Ishiba will seek to shore up support by promising more fiscal spending to mollify consumers.At the July monetary policy meeting, BOJ Governor Kazuo Ueda’s board raised its price projection more than expected for this fiscal year in its quarterly report, citing the impact of food inflation. The BOJ is largely expected to stand pat on rates when it next sets policy on Sept. 19.Traders see about a 51% chance of a BOJ rate hike by the end of October, as reflected by movements in the overnight swap index. That compares with around a 42% likelihood showing in the market a month ago. Benchmark 10-year bond yields hit the highest level since 2008 on Thursday, owing partly to speculation that the policy rate is headed higher.Also Read | Gold holds range-bound as investors await Jackson Hole symposiumJapan’s pace of inflation was the highest among Group of Seven nations this year until price trends in the UK more or less caught up a few months ago. Speaking on Bloomberg TV earlier this month, Bessent said he expects the BOJ to raise its benchmark rate as it’s already falling behind the curve in combating price growth. That view contrasted with Ueda’s repeated assurances that the BOJ isn’t behind the curve.After years of stagnating prices, Japanese businesses have become more willing in recent years to pass on rising costs for materials and labour to their customers through price increases, contributing to consumer perceptions that inflation may be sustained.The number of price hikes by major food and beverage companies in Japan was expected to reach 1,010 items in August, 50% more than a year ago, according to a report by Teikoku Databank.Ueda is attending the Kansas City Federal Reserve’s conference in Jackson Hole, Wyoming, this weekend. Traders will be searching for any clues that might emerge from the gathering, pointing to the potential timing for another BOJ rate hike.“If you just look at inflation data, the BOJ can raise rates anytime, but it makes sense for them to check momentum for wage growth next year, so for now I see December or January as the likely timing,” said Shinke. “But there is certainly a risk that it could come earlier, like in October.”
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