Daily Management Review

Though Japan's Inflation May Have Peaked, The BOJ's Stance Is Not About To Alter


Though Japan's Inflation May Have Peaked, The BOJ's Stance Is Not About To Alter
Data indicated that although Japan's core inflation remained over the central bank's 2% target in June for the fifteenth consecutive month, an index that excludes the impact of energy costs declined, suggesting that the extended commodity-driven pricing pressures may have reached their peak.
However, policymakers would believe that wage pressures have not yet increased to the point where the ultra-loose monetary policy needs to be adjusted right away, given that services price rise also slowed last month.
The report may lessen pressure on the Bank of Japan (BOJ) to soon start winding down its huge monetary stimulus, analysts say, even as it increases the likelihood that the central bank will revise this year's inflation projection next week.
"Cost-push inflation is finally beginning to peak out. We'll likely see inflation slow in coming months, which would allow the BOJ to keep policy steady for the time being," said Toru Suehiro, chief economist at Daiwa Securities.
"While services prices may rise next year, those for goods will stay weak. Inflation could hover around 1% next year."
According to data released on Friday, the national core consumer price index (CPI), which excludes the cost of fresh food, increased 3.3% from a year earlier in June, matching the median market prediction and quickening from a 3.2% increase in May.
The strain on homes was increased by a rise in utility costs as well as a persistent rise in the cost of food and other essentials.
Although the BOJ regularly monitors this index as a better indicator of trend inflation, it grew 4.2% from a year earlier in June, which was slower than a 4.3% increase in May.
It was the first slowdown since January 2022 in a sign the rapid pace of increase seen in the past few months, driven by a flurry of price hikes by companies, was moderating.
Services prices up 1.6% from a year earlier in June, following a 1.7% increase in May. Policymakers constantly monitor this data to see whether rising labour costs are driving inflation higher.
The information is released ahead of the BOJ's carefully watched policy meeting on July 27–28, when the board will present new quarterly predictions and talk about how far Japan has come in achieving its goal of 2% inflation.
Since inflation has been higher than the BOJ's target for more than a year, market rumours are rife that the BOJ may soon phase off its divisive yield curve control (YCC) strategy, maybe as soon as next week.
Kazuo Ueda, governor of the BOJ, has emphasised the importance of maintaining ultra-loose monetary policy until the recent cost-push inflation changes to one driven by strong domestic demand and greater wage growth.
The key would be whether businesses continued to offer better pay in 2017 in a similar manner to this year and began to reflect the increase in employee costs in service prices.
"If more firms hike wages and pass on the cost, services prices could overshoot," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
"Inflation excluding food and energy will likely moderate ahead, but the pace of slowdown could be gradual."
As part of its efforts to boost inflation to its 2% target under YCC, the BOJ sets short-term interest rates at -0.1% and purchases sizable quantities of government bonds to cap the yield on 10-year bonds at about 0%.