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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

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
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.

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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.

The prices of 6,532 food items are expected to rise in October, according to a Teikoku Databank survey. That compares with 2,493 items in August and 2,424 items in September.

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

“The surge in Japan’s core inflation even further above target in August likely won’t prompt the Bank of Japan to shift policy at this week’s meeting,” said Bloomberg economist Yuki Masujima. “But it will increase pressure on Governor Haruhiko Kuroda to explain how long the central bank will be willing to keep its stimulus at full-bore – rising costs of living look set to put a dent in the economy in the third quarter.”

Japan has no choice but to wait until the US economy peaks out and the yen’s decline takes a pause
Yuichi Kodama, Meiji Yasuda Research Institute economist

While the BOJ resists change, the US Federal Reserve has aggressively raised interest rates to cool inflation, and another jumbo increase is expected hours before the BOJ’s decision this week.

The policy dichotomy has helped the yen fall to fresh 24 year-lows versus the dollar, which has made energy and food imports more expensive for resources-poor Japan.

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

The yen’s fall has helped Japanese companies book the most profits since 1954 by inflating their overseas earnings when brought home. But the windfall has yet to lead to robust wage gains for workers, making households vulnerable to inflation.

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As for the yen, Kishida said Japan should take advantage of its weakness and bring back more corporate manufacturing bases and lure foreign tourists. Yet his ministers including Finance Minister Shunichi Suzuki have stepped up warnings about the yen when it slid to almost 145 per dollar this month.

“If the yen falls further, the government may try to intervene in foreign exchange markets, but that’s a tough option because the US is unlikely to give an OK,” said Meiji Yasuda’s Kodama. “Japan has no choice but to wait until the US economy peaks out and the yen’s decline takes a pause.”