Japan’s consumer price growth showed a notable acceleration in June, indicating persistent inflationary pressures before the upcoming Bank of Japan (BOJ) meeting. Economists, however, predict a slowdown in the coming months.
In June, prices excluding those for fresh food increased by 3.3% compared to the previous year, showing a slight acceleration from the rise observed in May. Notably, the impact of energy prices on inflation was less pronounced, as reported by the internal affairs ministry on Friday. Another measure of inflation, which also excludes energy prices, decelerated to 4.2% after reaching its highest point in over 40 years the previous month. Both figures aligned with consensus predictions.
These latest data may present challenges for BOJ Gov. Kazuo Ueda as he continues to support the case for persistent monetary stimulus. While the central bank is expected to maintain its main policy settings during the upcoming board meeting on July 27 and 28, a minority of analysts believe the BOJ might make adjustments to its yield curve control (YCC) program.
Masamichi Adachi, an economist at UBS Securities, believes that despite the current strong Consumer Price Index (CPI) reading, the BOJ is unlikely to make major policy changes. Adachi expects inflation to slow down as the pace of import-driven price gains tapers off. However, he still holds the belief that the central bank might tweak its YCC mechanism next week.
Inflation Forecasts and Monetary Stance
According to a Bloomberg News survey of economists, the BOJ is expected to raise its consumer inflation forecast for the current fiscal year to 2.3% during the upcoming meeting, up from the current 1.8%. Governor Ueda has justified maintaining an ultraeasy monetary stance based on the assumption that the recent pace of price gains is not sustainable. Conversely, the government raised its overall inflation forecast for this fiscal year to 2.6%.
Tokyo CPI and Government Price Relief Measures
The nationwide CPI gauge followed a re-acceleration of price momentum in the Tokyo area, partly due to utility rate hikes approved by the government, allowing power operators to raise rates from June. Economists at Bloomberg Economics expect inflation to pull back further in the upcoming July Tokyo CPI report, which will be released just hours before the BOJ’s meeting.
One of the key factors keeping inflation in check has been a series of government price relief measures. The question of extending electricity and gas subsidies, set to expire in September, has been a contentious issue among government officials. Some members of an advisory panel recommended gradually eliminating the price relief package.
Easing Pressure on Prices in the Economy
Signs indicate that upward pressure on prices might be easing in certain sectors of the Japanese economy. The pace of gains in the nation’s producer prices decelerated in June to 4.1% compared to a year earlier, the slowest rate since April 2021. Additionally, the core core gauge, which excludes fresh food and energy, experienced deceleration for the first time since turning positive in April 2022.
Takeshi Minami, chief economist at Norinchukin Research Institute, suggests that the momentum of businesses passing on their costs to consumers is starting to peak out. While the pace of deceleration is still unclear, a significant slowdown is expected around this fall.
Global Inflation Comparison
Despite the relative persistence of Japan’s consumer inflation, it remains notable when compared to global trends. In June, the U.S. inflation rate declined to a more than two-year low, while Britain’s inflation rate slowed to the lowest in 15 months. Europe’s headline inflation rate has almost halved from its peak of 10.6%, and China faces the risk of deflation as its economic recovery stutters.
Processed Food Prices Continue to Rise
Notably, prices of processed food continued to surge at the fastest rate in nearly 50 years, reaching 9.2%. However, a report by Teikoku Databank suggests that food price increases may level off around October, as consumers become more cautious about higher costs for necessities. The data firm estimates that the prices for about 1,000 food items, particularly alcohol, won’t go any higher this year, indicating that cost-driven inflation may be peaking.