Japan economists forecast biggest inflation gains since 1991

SOME Japan economists are revising up their inflation forecast by predicting a continued acceleration to above 3 per cent by the end of this year, suggesting more communication challenges ahead for Bank of Japan (BOJ) governor Haruhiko Kuroda's final months.

"We raise our CPI outlook as it has become clear that the wave of food price hikes will continue into autumn, likely exceeding our assumed scope and magnitude," Citigroup economists Kiichi Murashima and Katsuhiko Aiba wrote in a report on Friday (Aug 5).

Gains in consumer prices excluding fresh food, the BOJ's key inflation gauge, will accelerate to 3.2 per cent in October, the highest since February 1991, the economists say. The report follows an upward revision Wednesday by SMBC Nikko Securities, who now predict an increase of around 3 per cent in December.

The rising cost of living is set to complicate Kuroda's communication task before his term ends in April, as more criticism may build that the central bank's inflationary target has been reached. So far the governor has demonstrated determination to stick with monetary easing in the absence of solid wage gains. Adjusted for inflation, Japan's paychecks shrunk for a third month in June, according to a government report Friday.

Both Citi and SMBC Nikko point out the strength in processed food prices as businesses are likely to keep passing their surging costs onto consumers. Food companies say the number of items seeing price hikes will likely jump to 6,305 items in October, according to a Teikoku Databank survey. That compares with a monthly average of 1,151 items through July this year.

Still, the Citigroup economists don't see these shifts triggering a faster policy shift from Japan's central bank.

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"Underlying inflation is still low, with limited constructive change in prices when we exclude food, energy, and the influence of JPY depreciation," they said. "The BOJ is therefore unlikely to embark on early policy change, in our view, and we expect policy to stay on hold through 2023." BLOOMBERG