Daily Management Review

Japan's Inflation Remains Above The BOJ's Target Despite Reaching A Nearly 8-Year High


Japan's Inflation Remains Above The BOJ's Target Despite Reaching A Nearly 8-Year High
As price pressure from raw materials and yen weakness widened, Japan's core consumer inflation accelerated to 2.8 per cent in August, reaching its fastest annual pace in almost eight years and exceeding the central bank's 2 per cent target for a fifth straight month.
Even though many still anticipate the Bank of Japan (BOJ) to maintain its ultra-easy policy, the strength of August's inflation reinforced growing concerns among economists that price pressure will last longer than the BOJ has anticipated.
The BOJ will conclude its two-day policy meeting on Thursday, and analysts anticipate it to decide to keep both short- and long-term interest rates close to zero while taking into account the frailty of the economic recovery.
"The weak yen is importing inflation into Japan. Core consumer inflation is set to top 3% in October," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"Inflation may stay above 2% for another year or so. That could prod the BOJ to change the way it looks at prices," he said.
The increase in the core consumer price index (CPI), which includes fuel costs but exempts volatile fresh food prices, was slightly higher than the median market forecast of a 2.7 per cent rise. It came after a gain of 2.4 per cent in July.
The increase, which was the quickest since October 2014, was primarily caused by higher utility costs, rising food and grocery store prices, and the diminishing impact of last year's mobile phone fee reductions on the data.
Analysts predict that in October, when many retailers plan to raise prices and the base effect of additional 2021 cellphone fee cuts will be eliminated from the calculation, core consumer inflation will exceed 3 per cent.
The BOJ closely monitors an index that excludes fresh food and energy costs as a key indicator of the underlying strength of inflation, and it rose 1.6 per cent in August compared to a year earlier, which was the fastest rate of annual growth since 2015.
The BOJ's dovish stance on policy contrasts with predictions that the US Federal Reserve will raise interest rates on Wednesday, which would widen the gap with Japanese yields and possibly lead to another round of yen selling.
The inflation data illustrates the difficult situation the BOJ is in as it attempts to support a fragile economy by maintaining extremely low interest rates, which in turn are causing an unwelcome decline in the value of the yen that raises import prices.
The CPI data showed that while prices for goods were 5.7% higher in August than they were a year earlier, prices for services only increased by 0.2%. That dashed policymakers' hopes that the labor-intensive services sector would sharply increase prices and make up the difference by raising wages.
Household suffering puts additional pressure on Prime Minister Fumio Kishida, whose approval ratings have plummeted, to implement a new stimulus package to support growth.
In the second quarter, the third-largest economy in the world experienced annualized growth of 3.5 per cent. However, a resurgence in COVID-19 infections, supply issues, and rising raw material prices have hampered its recovery.
The BOJ has promised to maintain ultra-low interest rates, remaining an outlier in a global wave of monetary policy tightening. This is due to the fact that inflation is still modest compared to price increases seen in other major economies.