Japan’s inflation speeds up ahead of expected BOJ rate hold

JAPAN’S key inflation gauge accelerated in August for a fourth consecutive month, hours before the Bank of Japan (BOJ) is scheduled to wrap up its latest policy decision meeting.

Consumer prices excluding fresh food rose 2.8 per cent from a year earlier, speeding up from 2.7 per cent in July as processed food costs increased further, according to the Ministry of Internal Affairs on Friday (Sep 20). The result matched the consensus estimate.

The BOJ is widely expected to leave the benchmark rate at 0.25 per cent when its two-day meeting ends later Friday. Economists will be watching how governor Kazuo Ueda will communicate the prospects for further interest rate hikes in the coming months. Over half of BOJ watchers see authorities conducting their next rate hike in December.

The central bank has signalled it plans to raise the rate further if inflation develops in line with its forecasts, saying real rates remain considerably negative. The bank’s main inflation gauge, consumer prices excluding fresh food, has now stayed at or above the bank’s 2 per cent target for 29 months.

“Prices remain relatively stable and the BOJ can say it’s on track towards its 2 per cent price stability target,” said Yuichi Kodama, economist at Meiji Yasuda Research Institute. “An additional interest rate hike within this year is still possible.”

A deeper index excluding energy costs and fresh food prices rose 2 per cent, accelerating from 1.9 per cent in July. Service prices, seen by the BOJ as a key measure to examine the price trend, gained 1.4 per cent from a year earlier, unchanged from the pace in July.

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The BOJ’s communication is under scrutiny after global markets crashed shortly after its July hike. Officials have since explained the bank’s policy stance, with deputy governor Shinichi Uchida saying the bank will not raise the rate when markets are unstable. Others including Ueda have underscored the fact that the BOJ will keep raising rates if prices and the economy follow the bank’s outlook

The BOJ’s policy making is also at a delicate point in time after the US Federal Reserve conducted an outsize interest-rate cut, which initially pushed the yen higher versus the US dollar. Any more hawkish signals from the BOJ could strengthen the yen further, which in turn could weigh on Japanese exporters’ share prices.

The country’s economy rebounded in the second quarter with households and companies boosting spending. Policymakers hope that strong wage hikes this year will help households cope with inflation better, letting the so-called virtuous economic cycle take root in the economy. Japan’s real wages have now risen for two straight months.

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Inflation has been a key topic in the race to select Japan’s next prime minister. Some of the nine candidates for the ruling party’s leadership vote have called for further measures to help alleviate the pain inflicted on consumers, likely meaning that they will follow through on Prime Minister Fumio Kishida’s promise of an economic package later this year.

While most of the leadership hopefuls are supportive of the BOJ’s current stance, Economic Security Minister Sanae Takaichi stands out for taking a more dovish position. She said the BOJ should be more cautious about raising interest rates, as higher rates can keep young people from buying homes or companies from investing. The Liberal Democratic Party’s leadership election will be held on Sep 27. BLOOMBERG