Japan's Inflation Holds Above BOJ Target Amid Rate Hike Bets

Japan’s key inflation gauge held above the central bank’s target even as price gains moderated a tad, in data largely supporting the central bank’s view that underlying inflation remains solid.

(Bloomberg) — Japan’s key inflation gauge held above the central bank’s target even as price gains moderated a tad, in data largely supporting the central bank’s view that underlying inflation remains solid.

Consumer prices excluding fresh food rose 2.3% in October from a year earlier, down from 2.4% in September, the Ministry of Internal Affairs reported Friday. That was above the consensus estimate of 2.2%. An index excluding energy costs and fresh food prices gained 2.3%, up from 2.1%. 

Friday’s data are likely to keep the central bank on track to further normalize its policy settings with a rate hike in coming months, as predicted by most economists surveyed by Bloomberg. 

“Inflation is holding firm, barring electricity and gas elements. It’s driven partly by more expensive imports and consumption is in a so-so situation, but inflation remains strong,” said Takeshi Minami, economist at Norinchukin Research Institute. “I think the BOJ will raise interest rates again in December.”

The slower price growth was largely due to the effect of government’s intermittent steps to offset inflationary pressure with fiscal help. Last year’s removal of government subsidies pushed up the index at that time. 

In October, the advance in electricity costs slowed to 4% from 15.2% in September, while natural gas price gains also decelerated. Utility subsidies shaved 0.54 percentage point from the overall index.

On the other hand, processed food prices increased by 3.8%, accelerating from 3.1% in September. A report by Teikoku Databank showed food companies raised the prices of 2,911 items in October, the month marking the start of the fiscal second half. Prices of rice rose 60%.

The underlying price momentum remains solid and an acceleration of service price growth to 1.5% from 1.3% adds to the view that inflation is becoming more entrenched in the economy.

While Bank of Japan Governor Kazuo Ueda has refrained from giving any clear signals over the likely timing of the next rate hike, many economists expect the move to come either in December or January. The BOJ is set to deliver its next policy decision on Dec. 19.

What Bloomberg Economics Says…

“Service prices — the BOJ’s main focus — picked up, reflecting adjustments by companies at the start of the fiscal second half. Non-fresh food prices were also a driver, with the price of rice surging and imported food costs climbing. Putting it all together, the report is consistent with the BOJ’s view that its 2% target is becoming more secure, and that a weaker yen is increasing risks of an overshoot.”

— Taro Kimura, economist 

For the full report, click here. 

Meantime the government is stepping up efforts to ease the burden of persistent price gains on households. Prime Minister Shigeru Ishiba is expected on Friday to reveal the content of an economic stimulus package that will likely include fresh cash handouts for low-income households and a pledge to reinstate utility subsidies from January through March.

“I feel that the government’s economic stimulus measures are somewhat excessive. I wonder when they will stop subsidizing utility bills and gasoline prices,” Minami said. “But given the results of the recent election and as there will be another one next year, I think it’s inevitable that the scale of the measures will increase.”

Public discontent over inflation was a major factor behind the ruling coalition’s poor performance in last month’s national election, when it lost its majority in parliament.

The yen’s weakness makes it expensive to import goods, materials, food and energy from abroad. A recent acceleration of gains in producer prices will add pressure on companies to pass on cost increases to both retail and corporate customers. 

The yen’s slump has deepened following Donald Trump’s US presidential election victory. The BOJ may raise its benchmark interest rate in the near term should the currency continue its slide, according to Kazuo Momma, a former executive director in charge of monetary policy.

(Updates with economists’ comments)