Japan inflation hits 31-year high, calling central bank’s stimulus plans into question

The Bank of Japan’s governor has repeatedly said that it will keep interest rates at rock-bottom levels until there’s evidence of solid wage gains

But as price gains spread beyond energy items, pressure is mounting on the bank to justify the need for its ongoing monetary stimulus

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Shoppers walk along a street lined with shops in Yokohama, south of Tokyo. Japan’s inflation has quickened to its fastest rate in more than 30 years. Photo: AFP

Published: 2:32pm, 20 Sep 2022

Japan’s inflation quickened to the fastest pace in over three decades excluding tax-increase 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 per cent goal.

Consumer prices excluding fresh food rose 2.8 per cent in August from a year ago, the internal affairs ministry reported on Tuesday. Analysts had forecast a 2.7 per cent gain. It was the strongest reading since 1991, barring the effect of sales tax increases.

Rising energy and processed food costs continued to account for most of the year-on-year increase, while higher electricity prices and a smaller drag from mobile phone fees contributed to the acceleration.

Bank of Japan Governor Haruhiko Kuroda, whose term ends in April, has repeatedly said the central bank will keep interest rates at rock-bottom levels. Photo: Kyodo via Reuters

Despite the faster pace of inflation the report is unlikely to prompt the Bank of Japan to change its policy on Thursday. Governor Haruhiko Kuroda has repeatedly said the bank will keep interest rates at rock-bottom levels until solid wage gains make inflation more sustainable.

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

“The current cost-push inflation is bad for consumers, but the BOJ will keep easing, hoping it’ll eventually turn into positive inflation,” said economist Yuichi Kodama at the Meiji Yasuda Research Institute. He said “the central bank’s policy won’t change until Kuroda’s term ends as this is the last, big opportunity for Kuroda” to truly revive inflation.

But as price gains spread beyond energy items, pressure is mounting on the bank to justify the need for its ongoing stimulus. Consumer prices excluding fresh food and energy gained 1.6 per cent.