(Bloomberg) — Japan’s inflation accelerated as energy costs rose, a result that supports the case for the central bank to consider raising interest rates in the coming months.
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Consumer prices, excluding fresh food, rose 2.5% in May from a year earlier, accelerating from 2.2% in April, the interior ministry said on Friday. The reading came in slightly below economists’ consensus, while staying at or above the Bank of Japan’s 2% target for a 26th month. Inflation was fueled by a 14.7% increase in electricity prices.
The nationwide results were roughly in line with the May figures for Tokyo released three weeks ago.
The key gauge rebounded after two months of slowing, providing a rationale for the central bank to consider raising interest rates as early as next month, when the BOJ has said it will provide details about its plans to reduce buying you paid for it. Whether Friday’s report is strong enough to spur a move is open to question, according to Nobuyasu Atago, chief economist at Rakuten Securities’ Economic Research Institute.
«The CPI increase was within the expected range and I don’t think this report alone will be a deciding factor for the BOJ’s next rate hike,» Atago said. «I don’t think the BOJ can say that the certainty of hitting the 2% price target has increased just because of this report.»
Atago said the BOJ may have to wait to hike until it sees second-quarter economic growth data to be released in August.
What Bloomberg Economics Says…
“Picup was largely driven by a cost driver, not demand growth. There was little evidence that faster wage growth fueled services inflation, which has been the scenario the BOJ has been betting on. However, the core indicator rising further above the 2% inflation target is consistent with the central bank’s price outlook.”
– Taro Kimura, economist
For the full report, click here.
For now, Governor Kazuo Ueda is keeping his options open. Asked last week if the authorities might be able to raise rates at the same meeting, Ueda replied «of course,» as long as the data warrants such a move. He further highlighted the possibility of an early hike when he told parliament on Tuesday that there is a good chance the policy rate will rise next month, depending on economic and financial conditions.
However, there are reasons for caution. A deeper measure of inflation that strips out fresh food and energy prices rose 2.1% in May, marking the ninth consecutive month of cooling and rising utility prices, which the BOJ has highlighted as a key factor in its policy discussions, rose lower to 1.6% after slowing sharply to 1.7% in April. This slowdown may hint at a growing reluctance by businesses to raise prices further, as higher costs have further dampened consumer appetite.
«Utilities inflation is weak, which is negative for monetary policy,» said Atsushi Takeda, chief economist at the Itochu Research Institute. «The ideal situation would be for wage gains to be passed on to prices and for prices to rise steadily.»
Among the components weighing on the index were processed foods, for which price growth slowed to 3.2% partly due to base effects. The number of food items that saw price increases in May was less than half the figure in the same month last year, according to the latest survey by Teikoku Databank.
Next, there are favorable and unfavorable factors that affect prices. One of the main factors that drives prices higher is you are lean. The Japanese currency has been trading within a few yen of its 34-year low against the dollar for much of the past month.
The yen was trading around 158.85 per dollar on Friday morning in Tokyo, sparking a flurry of verbal interventions. Senior currency official Masato Kanda said there is no change in his stance on taking appropriate measures if there are excessive currency movements.
The continued wide gap between Japanese interest rates and those of its peers is expected to keep pressure on the yen against a range of currencies and rising fuel import-driven prices. Trade data for May showed Japan’s trade deficit widened to more than ¥1 trillion ($6.3 billion), as the weak currency inflated import bills.
Ueda has said that the authorities should monitor how well and import prices are affecting the wider economy.
Another positive risk stems from energy policies. The government began phasing out utility subsidies in May, steps that reduced electricity and gas consumption bills by up to 20% at one point. Economists see the end of utility subsidies, along with the increase in the renewable energy tax, pushing the inflation rate towards 3% over the summer.
On the other hand, tepid consumption is a factor that cools inflation. Consumer sentiment in Japan worsened by the most in two years in May as households grew increasingly concerned about persistent inflation.
Whether Japan can achieve a virtuous economic cycle that links wages to demand-led price gains is also a key part of Prime Minister Fumio Kishida’s agenda as he seeks an exit from deflation. The wage gains seen coming into effect from June and the government’s income tax cut are expected to boost customers’ disposable incomes. The extent to which the increased income boosts consumption – and prices – remains to be seen.
The Prime Minister is pinning his last hope on the economic recovery as his chances of leading his ruling Liberal Democratic Party into the next election appear to be fading. Two polls over the weekend showed voter approval fell to the lowest level since he took office in 2021.
— With the help of Yoshiaki Nohara and Keiko Ujikane.
(Updates with details with comments from economists)
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