Tokyo Inflation Slows, Supporting BOJ’s Price View for Now

Inflation in Tokyo slowed in May, an outcome that offers support for the Bank of Japan’s view that price gains will slow toward the autumn, though policymakers and economists remain at odds over the strength of trend.

(Bloomberg) — Inflation in Tokyo slowed in May, an outcome that offers support for the Bank of Japan’s view that price gains will slow toward the autumn, though policymakers and economists remain at odds over the strength of trend.

Consumer prices excluding fresh food climbed 3.2% in the capital in May, slowing from the previous month, according to the ministry of internal affairs Friday. The reading was weaker than economists’ forecast of a 3.4% gain. 

Still, there were also signs that the deeper price trend may be continuing to strengthen, offering a conflicting view of Japan’s complex inflation picture. The Tokyo figures are a leading indicator of the nationwide trajectory of prices. 

The deceleration largely reflects a decline in electricity and gas prices, amid ongoing government subsidies to keep a lid on rising costs. From this month there was also a drop in charges that fund the development of renewable energy.

The central bank has also argued that weakening commodity prices will increasingly weigh on prices this year and forecasts inflation to average 1.8% in the 12 months that started in April, a projection that most economists view as too low.

“Compared with the BOJ’s view, we see inflation remains stronger,” said Moe Nakahama, a research associate at Itochu Research Institute. While the key price gauge for the BOJ slowed this time due to factors including energy subsidies, Nakahama said underlying inflation remains strong.

“The BOJ will probably raise its price outlook in its July forecasts,” she said. “The key for policy will be how the bank judges current levels, wage growth, and underlying price momentum.”

Governor Kazuo Ueda said Thursday that he expected prices to slow first then pick up, speaking in his first group interview with media since taking the helm of the central bank. But Ueda also acknowledged that the future strength of the price trend is still far from clear.

Ueda kept his options open over policy, by playing down the importance of wages or any single economic dataset as a trigger for change. 

Read More: BOJ’s Ueda Says Wages Aren’t the Goal, Keeps Speculators in Dark

Still, while inflation remains above the BOJ’s 2% price target, speculation of possible policy change at the BOJ is likely to continue smoldering, especially with the underlying measure of prices showing a continued strengthening.

Prices excluding energy and fresh food, a gauge of the underlying inflation trend, rose at the fastest pace since 1982, an indication that gains are still widespread outside the energy sector. 

Cost-push inflation has been especially prominent in food products, which saw a 8.9% price rise from a year earlier. A specific measure of processed food items rose 9.5% from a year earlier, the biggest jump since 1975.

What Bloomberg Economics Says…

“The Bank of Japan will probably see the data, which is a leading indicator of the national trend, as validating its view that demand-led inflation has yet to take hold — and stimulus should stay unchanged.”

— Taro Kimura, economist

For the full report, click here

Electricity prices have continued to drag on overall inflation since government subsidies kicked in earlier this year. From May, households and businesses have also benefited from a reduction in levies that are used to support renewable energy development. 

Without government subsidies for electricity, gas and domestic tourism, overall inflation would have been almost a full percentage point higher.

There’s still high uncertainty over the future of utility prices, as the government has granted requests from major power companies to raise residential electricity rates from June. 

That could motivate Prime Minister Fumio Kishida to extend existing relief measures that are currently worth around 20% of household bills. 

Those measures are set to expire in September. Speculation continues that Kishida may call an early election after an uptick in public support for his cabinet.

–With assistance from Toru Fujioka.

(Updates with more details from report, economist comments)

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