Japan’s consumer prices have increased at a faster rate in June, signaling a persistent stickiness in inflation ahead of the Bank of Japan’s (BOJ) upcoming meeting. The rise in prices, excluding fresh food, reached 3.3% from a year ago, slightly accelerating compared to the previous month, as energy prices had a lesser impact on inflation. However, a deeper measure of inflation that excludes energy decelerated to 4.2% after reaching a 40-year high in the previous month. Despite these figures aligning with expectations, economists predict a slowdown in inflation in the coming months.
The latest data poses a challenge for BOJ Governor Kazuo Ueda as he continues to support the need for ongoing monetary stimulus. While the central bank is expected to maintain its main policy settings during the meeting on July 27-28, a minority of analysts anticipate adjustments to the BOJ’s yield curve control program.
According to Masamichi Adachi, an economist at UBS Securities, the current strong reading of the Consumer Price Index (CPI) does not necessarily indicate major policy changes by the BOJ. Adachi believes that inflation will gradually slow down due to diminishing import-driven price gains. However, he still maintains the view that the central bank may make tweaks to its Yield Curve Control (YCC) mechanism next week.
Economists surveyed by Bloomberg anticipate the BOJ to raise its consumer inflation forecast for the current fiscal year from 1.8% to 2.3% during the upcoming meeting. The BOJ has justified its ultra-easy monetary stance by arguing that the recent pace of price increases is not sustainable. On Thursday, the Japanese government also raised its overall inflation forecast for the fiscal year to 2.6%.
The nationwide Consumer Price Index (CPI) was released after the Tokyo area’s CPI reading showed a re-acceleration of price momentum, partially due to utility rate hikes authorized by the government in June.
While the government has implemented various measures to ease price pressures, extending electricity and gas subsidies beyond their expiration date in September has become a contentious issue among officials. Some members of an advisory panel have recommended a gradual elimination of the relief package.
There are indications that upward pressure on prices may be easing in certain sectors of the economy. In June, the pace of producer price gains decelerated to 4.1% YoY, the slowest rate since April 2021. Additionally, the core core CPI, which excludes fresh food and energy, decelerated for the first time since turning positive in April 2022.
However, Japan’s consumer inflation remains persistent compared to other countries in the global context. In June, the inflation rate in the US reached a more than two-year low, while Britain experienced a slowdown to a 15-month low. Furthermore, Europe’s headline inflation rate has almost halved from its peak of 10.6%, and China is facing deflation risks amidst a struggling economic recovery.
Processed food prices in Japan continue to rise at the fastest pace in nearly 50 years, with a growth rate of 9.2%. Nevertheless, a report by Teikoku Databank predicts that food price increases may level off around October as consumers become more cautious about higher costs of necessities. The data firm estimates that prices for approximately 1,000 food items, particularly alcohol, are unlikely to rise further this year, indicating a possible peak in cost-driven inflation.
In summary, Japan’s consumer prices have accelerated in June, indicating persistent inflationary pressures. This poses a challenge for the BOJ as economists forecast a slowdown in the coming months. While the central bank is expected to maintain its current policy settings, there is speculation about potential adjustments to its yield curve control program. The government has also raised its overall inflation forecast, while price relief measures and utility rate hikes have impacted the inflation trend. However, there are signs of easing upward price pressure in certain sectors. Japan’s inflation remains relatively persistent compared to other countries globally. Processed food prices continue to rise, but they are expected to level off in the coming months.
