Japan’s inflation hits 8-year high in test of BOJ’s dovish policy

  • September core CPI up 3.0% yoy, in line with forecasts
  • Core consumer inflation remains above BOJ target for 6th month
  • The data underscore mounting inflationary pressures
  • BOJ sees keeping ultra-low interest rates for weak economy

TOKYO, Oct 21 (Reuters) – Japan’s core consumer inflation rate accelerated to a fresh eight-year high of 3.0% in September, questioning the central bank’s determination to maintain its ultra-loose monetary policy stance amid the yen’s plunge to 32-year lows continues to drive up import costs.

The inflation data highlights the dilemma facing the Bank of Japan as it seeks to prop up a sluggish economy by maintaining ultra-low interest rates, which in turn are fueling an unwanted depreciation in the yen.

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The rise in the nation’s core consumer price index (CPI), which excludes volatile fresh groceries but includes fuel costs, was in line with a mid-market forecast and followed a 2.8% rise in August. It stayed above the BOJ’s 2.0% target for the sixth month and was the fastest pace of gains since September 2014, data on Friday showed.

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Widening price pressures in Japan and the yen’s plunge below the key psychological barrier of 150 against the dollar is likely to keep market speculation alive over the coming months about an adjustment to the Bank of Japan’s dovish stance.

“The current price increases are mainly driven by rising import costs and not by strong demand. Governor Kuroda may maintain his policy for the remainder of his term through April, although the key is whether the government will tolerate it,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

The data raises the likelihood of the BOJ upgrading its consumer inflation forecasts in new quarterly forecasts due at next week’s monetary policy meeting, analysts say.

The yen’s fall has been particularly painful for Japan, which is heavily dependent on imports for fuel and most commodities, and has forced companies to hike prices on a wide range of goods, including fried chicken, chocolate and bread.

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The so-called “core-core” index, which subtracts both fresh food costs and energy costs, rose 1.8% year-on-year in September, accelerating from a 1.6% gain in August and marking that fastest annual growth since March 2015.

The surge in the Core-Core Index, which the BOJ closely monitors as a key gauge of the underlying strength of inflation, towards its 2% target casts doubt on the central bank’s view that recent price increases will prove temporary .

With inflation in Japan still moderate compared to inflation in other major economies, the BOJ has pledged to keep interest rates extremely low and remains an outlier in a global wave of monetary tightening.

BOJ Governor Haruhiko Kuroda has stressed the need to focus on supporting the economy until wage growth picks up enough to offset the rising cost of living.

While Japan’s union lobby has pledged to call for pay rises of around 5% in next year’s wage negotiations, analysts doubt wages will rise that much as fears of a global recession and weak domestic demand cloud the outlook for many companies.

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September CPI data showed that goods prices rose 5.6% year-on-year, but services prices rose just 0.2%, suggesting that Japan’s inflation is still mainly driven by cost-pushing factors.

“Consumer inflation is likely to slow in 2023. If so, any change in the BOJ’s loose monetary policy will be minor even under the change in leadership of the bank next year,” said Yasunari Ueno, chief market economist at Mizuho Securities.

Governor Kuroda will see his second five-year term expire in April next year. The terms of office of his two deputy governors also end in March.

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Reporting by Leika Kihara and Takahiko Wada; Additional reporting by Yoshifumi Takemoto; Edited by Sam Holmes and Shri Navaratnam

Our standards: The Thomson Reuters Trust Principles.

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