Japan’s Inflation Speeds Up Ahead of Expected BOJ Rate Hold

Article Content

(Bloomberg) — Japan’s core inflation rate accelerated for a fourth straight month in August, hours before the Bank of Japan is due to conclude its latest policy meeting.

Consumer prices excluding fresh food rose 2.8% from a year earlier, accelerating from 2.7% in July as costs of processed foods rose, the Interior Ministry said Friday. The result was in line with consensus estimates.

Article Content

The Bank of Japan is widely expected to leave its benchmark interest rate at 0.25% when it concludes its two-day meeting later Friday. Economists will be watching how Governor Kazuo Ueda will talk about the prospects for another rate hike in the coming months. More than half of BOJ watchers expect the authorities to raise rates again in December.

The central bank has indicated it plans to raise interest rates again if inflation develops in line with its expectations, saying real prices remain largely negative. The bank’s main inflation measure, consumer prices excluding fresh food, has remained at or above the bank’s 2% target for 29 months.

“Prices remain relatively stable and the BOJ can say it is on track to achieve its 2% price stability target. It is still possible to raise interest rates again this year,” said Yuichi Kodama, an economist at Meiji Yasuda Research Institute.

What does the Bloomberg Economics report say?

“Japan’s August CPI rise is likely to boost the Bank of Japan’s confidence that inflation, supported by stronger wage growth, is now supporting underlying price trends.”

Article Content

Article Content

– Taro Kimura, economist

To view the full report, click here.

A deeper index that excludes energy costs and fresh food prices rose 2.0 percent, accelerating from 1.9 percent in July. Service prices, seen by the Bank of Japan as a key gauge of price trends, rose 1.4 percent from a year earlier, unchanged from July’s pace.

The Bank of Japan’s communications have come under scrutiny after global markets collapsed shortly after it raised interest rates in July. Officials have since clarified the bank’s policy stance, with Deputy Governor Shinichi Uchida saying the bank will not raise rates when markets are unstable. Others, including Ueda, have reiterated the fact that the BOJ will continue to raise rates if prices and the economy follow the bank’s expectations.

The Bank of Japan’s policymaking process is also at a delicate stage after the Federal Reserve made a large interest rate cut, which initially pushed the yen higher against the dollar. Any more hawkish signals from the Bank of Japan could boost the yen further, which in turn could weigh on Japanese exporter stocks.

The country’s economy rebounded in the second quarter as households and businesses boosted spending. Policymakers hope that strong wage increases this year will help households better handle inflation, allowing the so-called virtuous cycle to take root in the economy. Real wages in Japan have now risen for two straight months.

Article Content

Inflation has been a major issue in the race to choose Japan’s next prime minister. Some of the nine candidates running for the ruling party’s leadership have called for more measures to help ease the pain for consumers, which likely means they will follow through on Prime Minister Fumio Kishida’s promise of an economic package later this year.

While most of the candidates to lead the BOJ support the bank’s current stance, Economic Security Minister Sanae Takaichi stands out for taking a more dovish stance. She has said the BOJ should be more cautious about raising interest rates because higher rates could deter young people from buying homes or businesses from investing. The LDP’s leadership election is scheduled for Sept. 27.

(Updates with economist comments, more details.)

Article Content