Japan’s inflation continued to outpace expectations, adding to intense scrutiny over next week’s Bank of Japan policy meeting — the first under its new chief Kazuo Ueda.
(Bloomberg) — Japan’s inflation continued to outpace expectations, adding to intense scrutiny over next week’s Bank of Japan policy meeting — the first under its new chief Kazuo Ueda.
Consumer prices excluding fresh food rose 3.1% in March from a year ago, matching the pace of the previous month, the internal affairs ministry said Friday. Economists had expected the inflation measure to ease to 3%.
A separate gauge of price growth that excludes both energy and fresh food also proved stronger than expected, climbing to 3.8% for its highest reading since 1981. The figure, considered an indicator of underlying price trends, appeared to show unexpected stickiness, even if the margins look relatively small in comparison with other major economies.
Forecasting inflation to fall below 2% later this year, the BOJ has said its ultra-easy monetary policy is still appropriate as its inflation target hasn’t been achieved in a sustainable way. That’s a line Ueda has largely adopted since taking the helm of the central bank earlier this month.
Still, with inflation above the BOJ’s 2% target for a 12th straight month, speculation continues to simmer that the central bank will pull back from its stimulus program in the coming months. The change in leadership has added to market talk of a possible shift.
“Underlying inflation is strong as shown by the figure excluding fresh food and energy,” said Koya Miyamae, senior economist at SMBC Nikko Securities. “Japanese companies are passing their costs in stages so the impact of last year’s dramatic increase in import prices is continuing.”
Processed food was the largest driver of prices, gaining 8.2% for the biggest increase since 1976. More than 20,000 food items including seaweed and noodles are set to go up in price through July this year, reaching that mark at a much faster pace than last year, according to a Teikoku Databank report.
“Pressure to raise food prices is still continuing, and food prices will remain high for about a half year,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “Also, wages have been increasing recently. That can be seen as an opportunity to raise prices.”
Prime Minister Fumio Kishida’s administration has implemented a series of measures to keep a lid on prices, despite its long-running aim to achieve inflation, to curb voter dissatisfaction and to ensure inflation doesn’t upend consumer spending.
The stop-gap moves have been masking the strength of the inflation trend, making it complicated for policymakers to judge its momentum. The latest release showed that overall price growth would have been around 4.3% without the downward pressure of government subsidies for natural gas, electricity and domestic travel.
What Bloomberg Economics Says…
“For the Bank of Japan, the message is likely to be that inflation is still mostly powered by higher costs, not pulled by stronger demand. We doubt Friday’s data will change the calculus for the BOJ — we still see it standing pat at next week’s meeting.”
— Chang Shu, economist
For the full report, click here
Still, economists largely subscribe to the view that price growth will cool as the year progresses even if they differ over the pace of deceleration. The consensus view is also that Ueda will hold off on changing policy for now.
BOJ officials are wary of tweaking or scrapping their control of yields at the meeting so soon after the banking crisis overseas clouded the outlook, according to people familiar with the matter.
A Bloomberg survey of 47 economists, showed that 87% of respondents expect no change at the upcoming meeting. Many of them cited the financial sector turmoil as a factor.
Still, the same poll showed that more than half of respondents expect that when the BOJ chooses to scrap yield curve control, it will do so without warning.
“Today’s data could have impact on BOJ’s inflation outlook,” Miyamae said. “Still on whether they are going to raise rates anytime soon, I doubt it, because their view is that inflation will weaken from its current strength.”
–With assistance from Jon Herskovitz.
(Adds economist comments)
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