MNI INSIGHT: 3% Japan CPI Eyed But Easy Policy To Remain

Japan’s core consumer price index rose 2.4% year-on-year in July, hitting the highest level since December 2014 when it rose 2.5% and there are expectations among Bank of Japan officials of it reaching 3% later this year, MNI understands.

Core inflation rising to 3% will not lead to a shift of the central bank’s easy policy, however, as it won’t be seen as sustainable. The index is expected to slow in fiscal 2023 as base effects from the rise in energy prices drop out (MNI INTERVIEW: Global Risks Mean BOJ Must Stay Easy - Sekine).

July’s rise was driven by food and energy prices, posting an 11th straight rise and leading to the fourth consecutive month in which core CPI breached the BOJ’s 2% target.

The underlying inflation rate measured by the core-core CPI (excluding fresh food and energy) rose 1.2% y/y in July, up from June’s 1.0%.

WEAKER YEN

Corporate cost pass-through continues as the impact of the yen’s weakness this year has yet to be been fully transferred to retail prices, paving the way for core CPI to rise to 3% or higher.

The BOJ board’s median forecast for core CPI this fiscal year is 2.3% but the median forecast in fiscal 2023 points to a deceleration to 1.4%.

Bank officials still believe the 2% price target will not be achieved sustainably unless regular workers’ cash earnings rise above 2% and medium-to-long-term inflation expectations rise, leading to wage inflation. Near-term inflation expectations of households, firms, and market participants have increased recently, reflecting the rise in energy and other prices over the past year.

There is also a risk that consumer sentiment and private consumption fall as living costs continue to rise, but there is still some optimism that household spending could be supported in part by the excess savings built up through the pandemic.