Japan’s inflation hits an 8-year high in a test of the Bank of Japan’s cautious policy

  • Core CPI for September rose 3.0% YoY, matching expectations
  • Core consumer inflation remains above BOJ target for sixth month
  • Data confirms widening inflationary pressure
  • The Bank of Japan has seen keeping interest rates very low on the fragile economy

TOKYO (Reuters) – Japan’s core consumer inflation accelerated to an eight-year high of 3.0% in September, challenging the central bank’s determination to maintain its ultra-easy stance in policy as the yen continues to slide to a 32-year low. to raise import costs.

Inflation data highlights the dilemma the Bank of Japan faces as it tries to support the weak economy by maintaining ultra-low interest rates, which in turn fuels the unwanted slide in the yen.

Reuters graphics

The increase in the nationwide Core Consumer Price Index (CPI), which excludes volatile fresh food but includes fuel costs, matched median market expectations and followed a 2.8% rise in August. Friday’s data showed it stayed above the Bank of Japan’s 2.0% target for the sixth month, and was the fastest pace of gains since September 2014.

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Expanding price pressures in Japan and the yen’s collapse below the key psychological barrier of 150 against the dollar is likely to keep market speculation about an adjustment in the BoJ’s pessimistic stance over the coming months.

said Takeshi Minami, chief economist at Norinchukin Research Institute Inc.

The data increases the chance that the Bank of Japan will revise its expectations for consumer inflation in the new quarterly forecast scheduled for next week’s policy meeting, analysts say.

The yen’s decline has been particularly painful for Japan due to its heavy reliance on imports for fuel and most raw materials, forcing companies to raise prices for a wide range of goods including fried chicken and chocolate to bread.

The so-called “core” index, which strips out both food and fresh energy costs, rose 1.8% in September from the previous year, accelerating from a 1.6% gain in August, and representing the fastest annual pace since March 2015.

The rally in the core index, which the BoJ is watching closely as a key gauge of the underlying strength of inflation, toward its 2% target casts doubt on the central bank’s view that the recent price rally will be temporary.

With inflation in Japan remaining modest compared to the price hikes seen in other major economies, the Bank of Japan pledged to keep interest rates very low, staying out of the global wave of monetary tightening.

Bank of Japan Governor Haruhiko Kuroda stressed the need to focus on supporting the economy until wage growth picks up enough to offset the rising cost of living.

While Japan’s trade union lobby has pledged to demand a roughly 5% wage hike in next year’s wage negotiations, analysts doubt wages will rise much, with fears of a global recession and weak domestic demand overshadowing the expectations of many companies.

September CPI data showed that while prices of goods rose 5.6% year-on-year, prices of services rose only 0.2% in a sign that inflation in Japan is still mostly driven by cost drivers.

“Consumer inflation is likely to slow in 2023. If so, any adjustment to the Bank of Japan’s easy monetary policy would be slight even with the change in the bank’s leadership next year,” said Yasunari Ueno, chief market economist at Mizuho Securities.

Governor Kuroda will see his second five-year term expire in April next year. The mandate of his two deputies will expire in March.

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(Reporting by Leika Kihara and Takahiko Wada) Additional reporting by Yoshifumi Takemoto. Editing by Sam Holmes and Shri Navaratnam

Our Standards: Thomson Reuters Trust Principles.

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