Daily Management Review

Consumer Inflation In Japan Reaches A New 40-Year High; Attention Focused On BOJ Policy


Consumer Inflation In Japan Reaches A New 40-Year High; Attention Focused On BOJ Policy
The core inflation of Japan touched a record high of four decades since companies continued passing on increased costs of operations to consumers, according to data, indicating that price increases were widening and could put the central bank under pressure to reduce massive stimulus.
Bank of Japan (BOJ) policymakers discussed the possible market impact of a prospective exit from ultra-low interest rates months before Tuesday's unexpected tweak to its yield control policy, according to minutes of their October meeting released on Friday.
While many retailers expect further increases in food prices next year, analysts say the risk of a global recession and uncertainty about the pace of wage increases cloud the outlook for inflation and the timing of any further BOJ policy changes.
"The hurdle for policy normalisation isn't low. The global economy may worsen in the first half of next year, making it hard for the BOJ to take steps that can be interpreted as monetary tightening," said Takeshi Minami, chief economist at Norinchukin Research Institute.
Japan's core consumer price index (CPI), which excludes volatile fresh food but includes energy costs, rose 3.7% year on year in November, matching market expectations and improving from a 3.6% gain in October.
It was the largest increase since December 1981, when inflation was still high due to the effects of the 1979 oil shock and a booming economy.
Aside from utility bills, prices increased for a wide range of goods, including fried chicken, smartphones, and air conditioners, indicating rising inflationary pressure.
Many analysts expect core consumer inflation to return to near the Bank of Japan's 2% target next year, as the base effect of previous fuel price spikes fades and the impact of government subsidies to reduce electricity prices kicks in in February.
However, an index that excludes such one-time factors may remain elevated, putting pressure on the BOJ to remain vigilant to the possibility of a demand-driven rise in inflation.
The so-called "core-core" index, which excludes both fresh food and energy prices, increased 2.8% year on year in November, following a 2.5% increase in October.
The increase in the core-core index, which the BOJ closely monitors as a measure of demand-driven inflation, demonstrates how inflationary pressures are building in once-deflationary Japan and could last well into next year.
Companies expect to raise prices for 7,152 food products in the first four months of 2023, more than doubling the number in the same period this year, according to a report by research firm Teikoku Data Bank.
"We'll likely see a rush in price hikes next year that could be more intense than this year," as companies face rising labour and distribution costs, Teikoku Data Bank said.
The BOJ surprised the markets on Tuesday by adjusting its yield control and allowing long-term interest rates to rise more. Market participants view this action as a precursor to a further withdrawal of the BOJ's massive stimulus program.
Haruhiko Kuroda, the governor of the BOJ, whose term will end in April, stated that the bank had no intention of reducing stimulus because inflation was predicted to slow to below 2% in 2019.
However, the October minutes revealed how many of his fellow board members are now focusing on the possibility of a stimulus withdrawal and the risk of an inflation overshoot.
"Given structural changes such as a shift away from globalisation, past experiences in Japan may not necessarily apply. We can't rule out the chance of a big overshoot in inflation," one member was quoted as saying in the October minutes.
The BOJ will likely examine the CPI data closely when it releases new quarterly inflation forecasts at a two-day policy meeting that ends on January 18.
The BOJ is currently forecasting core consumer inflation to slow to 1.6% next fiscal year after hitting 2.9% in the current fiscal year ending in March 2023, according to many analysts. However, this forecast was made in October.
Unexpectedly, Japan's economy contracted by an annualized 0.8% in the third quarter as concerns about a global recession and rising import costs affected consumer spending and business activity.
Analysts anticipate a pick-up in growth in the current quarter, but it's unclear if wages will increase by enough to help households offset rising living expenses and support consumption.