Daily Management Review

BoJ Rate Rise Path Is Obscured As Demand-Driven Inflation In Japan Slows Down


BoJ Rate Rise Path Is Obscured As Demand-Driven Inflation In Japan Slows Down
Data released on Friday revealed that while energy taxes caused Japan's core inflation to increase in May, an indicator that eliminates the impact of fuel decreased for the ninth consecutive month, making the central bank's choice over whether to hike interest rates more difficult.
The Bank of Japan regularly monitors "core core" inflation as a crucial indicator of demand-driven price movements, and the slowing in this inflation puts the bank's belief that growing wages will support inflation and keep it on pace to meet its 2% objective over time in jeopardy.
According to official data, the core consumer price index (CPI), which does not include volatile fresh food, increased 2.5% in May over the prior year. This increase was mainly caused by an increase in the renewable energy levy. The previous month's gain was 2.2%. It was almost in line with the 2.6% rise predicted by the median market.
However, the rate of inflation, as determined by an index that deducts gasoline and fresh food, decreased to 2.1% in May from 2.4% in April, which is the lowest annual growth since September 2022.
The rate of service inflation in the private sector decreased to 2.2% in May from 2.4% in April, indicating that businesses continued to be cautious when it came to passing on employment expenses.
"The Bank of Japan has been arguing that the strong pay hikes agreed upon in this year's spring wage negotiations will eventually provide a boost to services inflation, but so far there's little evidence of that happening," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.
The forecast for inflation is clouded by a further spike in the price of crude oil and an increase in import expenses due to a weaker yen.
Due to growing raw material costs, analysts predict that after this month, the core CPI will accelerate to around 3%. However, this kind of pressure may reduce demand and deter businesses from raising prices, which would make it more difficult for the BOJ to maintain underlying, demand-driven inflation consistently around its 2% objective.
Takeshi Minami, chief economist of Norinchukin Research, stated that "real wage growth remains weak in Japan and there's no data confirming that demand-driven inflation is accelerating."
"The BOJ probably won't raise rates again at least until October-December this year," he said.
The BOJ made a historic move away from a major stimulus plan that lasted ten years in March when it stopped controlling bond yields and negative rates.
It has also hinted that it may boost short-term rates to levels that neither cool nor overheat the economy, which economists believe to be between one and two percent. This comes after inflation has exceeded the 2% objective for the past two years.
Though opinions among economists over when the BOJ would raise interest rates to 0.25% this year are mixed, many predict that it will happen in July.
BOJ Governor Kazuo Ueda has stated that rate increases will occur if the central bank grows increasingly certain that strong domestic demand and rising salaries would support inflation reaching 2% over the long run.
Weak consumption signals from recently are still concerning. Japan's GDP shrank in the first quarter, partly as a result of a 0.7% decline in consumption as growing living expenses deter families from increasing their expenditure.