Wednesday, September 21 2022

Inflation in Japan has accelerated at the fastest pace in more than three decades, excluding distortions from tax hikes, creating headaches for the central bank this week as it seeks to explain why it must pursue monetary stimulus while inflation is well above its 2% target.

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(Bloomberg) — Japan’s inflation quickened to the fastest pace in over three decades excluding tax-hike distortions, creating headaches for the central bank this week as it seeks to explain why it needs to continue with monetary stimulus when inflation is far above its 2% goal. 

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Consumer prices excluding fresh produce rose 2.8% in August from a year ago, the Interior Ministry reported on Tuesday. Analysts had expected a gain of 2.7%. It was the strongest reading since 1991, excluding the effect of sales tax increases.

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Rising energy and processed food costs continued to account for most of the year-over-year increase, while higher electricity prices and a smaller slowdown in telephony charges mobile contributed to the acceleration.

Despite the faster pace of inflation, the report is unlikely to prompt the Bank of Japan to change policy on Thursday. Governor Haruhiko Kuroda has repeatedly said the bank will keep interest rates low until strong wage gains make inflation more sustainable.

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Kuroda’s determination to stick with stimulus has positioned the BOJ as an outlier among central banks. The Federal Reserve, Bank of England and Swiss National Bank are among those likely to raise interest rates this week. leaving the BOJ even more isolated with its political position.

Read more: Kuroda’s BOJ is set to become the world’s last negative rate hold

“Current cost-driven inflation is bad for consumers, but the BOJ will continue to slow, hoping it will eventually turn into positive inflation,” said economist Yuichi Kodama of the Meiji Yasuda Research Institute. “Central bank policy will not change until Kuroda’s term ends, because this is Kuroda’s last big opportunity” to truly kick-start inflation.

But as the price gains spread beyond energy items, pressure is mounting on the bank to justify the need for its continued stimulus. Consumer prices excluding fresh food and energy increased by 1.6%.

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Prices for 6,532 food items are expected to rise in October, according to a Teikoku Databank survey. This compares to 2,493 articles in August and 2,424 articles in September.

Analysts are raising their forecasts after the recent rapid fall in the yen. Takeshi Minami, chief economist at the Norinchukin Research Institute, expects the yen’s recent moves to keep inflation high for longer than currently expected.

What Bloomberg Economics says…

“A surge in core inflation in Japan even further above target in August is unlikely to prompt the Bank of Japan to change its policy at this week’s meeting. But it will increase pressure on Governor Haruhiko Kuroda to explain how long the central bank will be willing to keep its stimulus plan at full steam – the rising cost of living is expected to put a damper on the economy in the third trimester.

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—Yuki Masujima, Economist

For the full report, click here

While the BOJ holds firm, the US Federal Reserve has been aggressively raising interest rates to calm inflation, and another big hike is expected hours before the BOJ’s decision this week.

The political dichotomy helped the yen fall to fresh 24-year lows against the dollar, making energy and food imports more expensive for resource-poor Japan.

Prime Minister Fumio Kishida let the BOJ stay the course under Kuroda, whose term ends in April. While supporting central bank decisions, the prime minister has used government spending and price caps to manage the impact of inflation on businesses and households.

The falling yen has helped Japanese companies post the most profits since 1954 by boosting their profits abroad when repatriated. But the windfall has yet to result in solid wage gains for workers, leaving households vulnerable to inflation.

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Current BOJ Inflation Outlook:

Regarding the yen, Kishida said Japan should take advantage of its weakness and bring back more business manufacturing bases and attract foreign tourists. Yet his ministers, including Finance Minister Shunichi Suzuki, stepped up warnings about the yen when it slipped to nearly 145 to the dollar this month.

“If the yen goes down further, the government can try to intervene in the currency markets, but that’s a difficult option because the United States is unlikely to agree,” Meiji Yasuda’s Kodama said. “Japan has no choice but to wait for the US economy to peak and the yen’s decline to pause.”

(Updates with more report details, comments from economists)

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