Japan's inflation hits 8-year high as BOJ's accommodative policy test

Japan’s inflation hits 8-year high as BOJ’s accommodative policy test

  • September core CPI rises 3.0% yr, in line with forecast
  • Core consumer inflation remains above BOJ target for 6th month
  • Data point to widening inflationary pressures
  • BOJ keeps interest rates ultra-low on fragile economy

TOKYO, Oct 21 (Reuters) – Japan’s core consumer inflation rate accelerated to a new eight-year high of 3.0% in September, challenging the bank’s resolve to maintain its ultra-accommodative policy as the yen continues to fall to its lowest level in 32 years, driving up import costs.

The inflation data highlights the dilemma facing the Bank of Japan as it tries to prop up a weak economy by keeping interest rates rock-bottom, which in turn fuels an unwelcome drop in the yen.

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The rise in the national core consumer price index (CPI), which excludes volatile fresh foods but includes fuel costs, was in line with a median market forecast and followed a 2.8% rise in August. It remained above the BOJ’s 2.0% target for the sixth month and was the fastest pace of gain since September 2014, data showed Friday.

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Widening pricing pressures in Japan and the yen’s fall below the key psychological barrier of 150 to the dollar will likely keep market speculation alive that the Bank of Japan’s dovish stance will change over the coming months. .

“Current price increases are mainly due to rising import costs rather than strong demand. Governor Kuroda may maintain his policy for the rest of his term until April, although the key is knowing whether the government will tolerate this,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

The data raises the chances that the BOJ will revise its consumer inflation forecast upwards in the new quarterly forecast due at next week’s policy meeting, analysts said.

The fall in the yen has been particularly painful for Japan due to its heavy reliance on imports of fuel and most raw materials, forcing companies to raise prices for a wide range of products, including fried chicken, chocolates and bread.

People walk through the Ameyoko shopping district in Tokyo, Japan May 20, 2022. REUTERS/Kim Kyung-Hoon

The so-called core-core index, which strips out both fresh food and energy costs, rose 1.8% in September from a year earlier, accelerating from a gain of 1.6% in August and marking the fastest annual pace since March 2015.

The rise in the core-core index, which the BOJ is watching closely as a key indicator of the underlying strength of inflation, towards its 2% target casts doubt on the central bank’s view that recent price increases will prove temporary.

With inflation in Japan still modest compared to price increases seen in other major economies, the BOJ has pledged to keep interest rates very low, remaining an outlier in a global wave of tightening. Monetary Policy.

BOJ Governor Haruhiko Kuroda stressed the need to focus on supporting the economy until wage growth picks up enough to offset the rising cost of living.

While Japan’s labor lobby has pledged to demand wage hikes of around 5% in wage talks next year, analysts doubt wages will rise as much, fears of a global recession and… weak domestic demand clouding the outlook for many businesses.

September CPI data showed that while goods prices rose 5.6% year-on-year, services prices rose only 0.2%, a sign that inflation in Japan is on the mend. still primarily fueled by cost push factors.

“Consumer inflation is expected to ease in 2023. If so, any adjustment to the BOJ’s accommodative monetary policy will be minor, even as part of the bank’s leadership change next year,” said Yasunari Ueno, chief economist at Mizuho Securities.

Governor Kuroda will see his second five-year term expire in April next year. The terms of its two deputy governors will also end in March.

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Reporting by Leika Kihara and Takahiko Wada; Additional reporting by Yoshifumi Takemoto; Editing by Sam Holmes and Shri Navaratnam

Our standards: The Thomson Reuters Trust Principles.

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