Japan’s inflation accelerates on energy as Bank of Japan seeks more data
JAPAN’S key inflation gauge strengthened on the waning impact of government energy subsidies as the central bank continues to parse data before deciding on the timing of its next interest rate hike.
Consumer prices excluding fresh food rose 2.7 per cent in November from a year earlier driven by higher energy costs, the Ministry of Internal Affairs reported on Friday (Dec 20). That came in above a consensus estimate of 2.6 per cent, and was higher than October’s 2.3 per cent increase. An index excluding energy costs and fresh food prices advanced 2.4 per cent, up from 2.3 per cent.
Friday’s data support the view among economists that inflation continues to develop in line with the Bank of Japan’s (BOJ) outlook and the bank will likely keep reducing the degree of its monetary easing with gradual interest rate hikes.
Governor Kazuo Ueda refrained from giving a clear signal over the timing of the next hike after the BOJ held its benchmark interest rate unchanged on Thursday. He did not rule out a hike in January, but his dovish comments opened up the possibility of a March hike.
“Today’s report is probably in line with the BOJ’s view so it will not make the bank think a faster pace of rate hikes is needed,” said Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute. “The chances are probably high for a January hike due to the weak yen and inflation a little stronger than expected.”
The faster inflation was largely driven by a winding down of government utility subsidies. Prime Minister Shigeru Ishiba has already decided to reinstate them from January to March as part of his economic stimulus package, a factor that will again weigh on inflation data early next year. The package includes cash handouts to low-income households as well.
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In November, electricity costs gained 9.9 per cent from a year ago, up from 4 per cent in October, while the increase in gas costs also accelerated to 6.4 per cent from 1.8 per cent. As government help is phased out for now, the dampening effect of utility subsidies on overall inflation weakened by 0.2 percentage point compared with the previous month.
Service prices rose 1.5 per cent, unchanged from last month, an indication that inflation is reaching into the wider economy, though the rate remains below the main gauge. Processed food prices increased 4.2 per cent, up from 3.8 per cent in October. Food companies are planning a price increase of 3,933 products in 2025, 2.5 times this year’s initial plans, according to Teikoku Databank.
“Businesses are continuing to pass their costs onto consumers, with the weak yen playing a key role,” said Dai-Ichi Life’s Shinke. “That means real wages won’t be showing a clear rise or acceleration, keeping consumer spending as a concern for the economy.”
Inflation has become a key economic and political topic in Japan after years of falling prices. Public discontent with government price relief measures was a major reason behind the ruling coalition’s setbacks in October’s election.
Price growth has remained at or above the BOJ’s 2 per cent target for more than 30 months, but the government has opted to provide subsidies for households and businesses rather than pressuring the BOJ to cool inflation with rate hikes as it still sees a risk of sliding back into deflation. BLOOMBERG
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