Japan’s inflation accelerated beyond 4% to set a fresh four-decade high, underscoring the challenges lying ahead for Bank of Japan Governor nominee Kazuo Ueda just before his first major public appearance since he was tapped by the government.
(Bloomberg) — Japan’s inflation accelerated beyond 4% to set a fresh four-decade high, underscoring the challenges lying ahead for Bank of Japan Governor nominee Kazuo Ueda just before his first major public appearance since he was tapped by the government.
Consumer prices excluding fresh food rose 4.2% in January from a year ago, picking up speed from December’s figure of 4%, the internal affairs ministry reported Friday. The reading was the highest since 1981 and slightly below economist forecasts of a 4.3% gain.
Hotel fees dragged much less on inflation in January, helping lift the key gauge, while car insurance fees also helped raise prices. Energy price gains slightly slowed.
Strengthening inflation is highlighting attention on the BOJ’s stimulus program and whether it is still needed when prices are growing at more than twice the speed targeted by the central bank. Outgoing Governor Haruhiko Kuroda has insisted the BOJ must keep easing in place until there is more evidence of stronger wage growth to ensure the sustainability of stable inflation, a goal he has pursued for the last decade. But market players are speculating that changes are likely to come early in the new governor’s term.
“At Ueda’s hearing today, markets will focus on getting a clue on when and to what extent he will tweak the current framework,” said Atsushi Takeda, chief economist at Itochu Research Institute. “Ueda has said that the current price hike is a temporary trend and I don’t expect him to depart from that today.”
Most economists see the acceleration coming to a halt in February, when the additional effects of Prime Minister Fumio Kishida’s stimulus package are expected to materialize.
Kishida’s stimulus package, worth 39 trillion yen ($289 billion) in fiscal spending, includes a series of anti-inflationary measures. Analysts predict the measures will bring the inflation reading down below 4% in February.
The program’s centerpiece is a set of subsidies for electricity. The additional support is expected to cut electric bills by 20%.
What Bloomberg Economics Says…
“Looking ahead, we expect core inflation excluding fresh food to drop sharply to 3.1% in February. Subsidies starting in the month to discount electricity and gas costs should bring relief.”
— Yuki Masujima, economist
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Still, the figure is likely to remain well above the central bank’s 2% price goal for some time, suggesting inflation will continue to be a challenge for the next governor. Ueda will likely be tasked with the difficult prospect of moving policy toward normalization.
Last week the government nominated Ueda, a university professor and former BOJ board member, to lead the central bank from April, replacing Kuroda.
One of Ueda’s first tasks could be reviewing the existing policy framework, and assessing whether the bank’s price target is close to being met.
Kuroda has repeatedly maintained that the current strength of price gains is based on cost-push factors, and that core inflation will slow below 2% sometime this fiscal year. He has also insisted that wage growth isn’t strong enough for sustainable inflation.
Ueda is set to be grilled on the details of his view Friday, as he faces parliamentary hearings in the lower house. Financial markets are likely to be parsing his every word, including his view on prices.
Read More: What to Look for During Hearings for BOJ Nominee Kazuo Ueda
While Kishida’s package may bring some relief, households could still be hit by faster price gains later in the year.
Utility operators are now requesting the government to raise power rates in response to soaring fuel costs and the weak yen. Last month Tokyo Electric Power Co. announced that it had applied to lift residential electricity prices by about 30% from June.
Price hikes for processed foods, another major driver of overall inflation, remain a cause for concern. Some 5,500 food items will see price increases in February, the largest number since October, according to a Teikoku Databank report. The data firm also said more than 2,000 items are expected to go up in price each month through the summer.
(Updates with additional details from the report, economist comments)
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