Tokyo inflation picks up, keeping Bank of Japan on track for further hike

[TOKYO] Tokyo’s key inflation gauge picked up for the first time in eight months, keeping the Bank of Japan (BOJ) on a trajectory to raise interest rates further.

The consumer price index excluding fresh food rose 1.6 per cent in June from a year earlier in the capital, according to Friday (Jun 26) data from the Ministry of Internal Affairs and Communications. The reading was in line with the median forecast in a Bloomberg survey of economists.

Forecasters predicted the gauge would accelerate from last year’s reading, which was depressed by certain government relief measures.

Meantime, a measure that excludes both fresh food and energy, closely watched by the BOJ as a gauge of underlying inflation, climbed 1.9 per cent. The overall CPI rose 1.7 per cent. The Tokyo CPI is considered a leading indicator for nationwide price trends.

The advance in the CPI was led by fees for water services after subsidies ended. Energy prices continued to fall, thanks to petrol subsidies implemented by Prime Minister Sanae Takaichi.

The pickup in the CPI may fuel policymakers’ concern of inflation potentially overshooting the BOJ’s 2 per cent target.

While Japan’s inflation readings have so far been restrained by temporary government programmes to lower the cost of living, Friday’s data will support the bank’s stance to bring up rates from the lowest level among major economies, following a widely expected hike last week.

“The basic direction has not changed – inflation is still gradually heading back towards 2 per cent,” said Koya Miyamae, senior economist at SMBC Nikko Securities. “If we look only at CPI, excluding the FX trends, I’d say the BOJ is still on track for rate hikes at a cruising pace for now.”

The yen, which has been hovering near the weakest level in nearly four decades, could keep inflation elevated. Traders are on guard, should authorities step into the market again after repeated verbal warnings from the Finance Ministry and a record intervention in recent weeks.

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Japan’s businesses have been showing signs of a shift in their price-setting behaviours since the outbreak of the war in Iran. Instead of cutting costs as much as possible, a number of firms have announced prices hikes, including Keihan Bus and snack maker Kameda Seika recently.

Food price trends were mixed. Rice prices fell 6 per cent, continuing the reversal from last year’s spike, while prices for pork, tuna and potato chips all rose at a double-digit clip. Service prices, a key indicator of demand-driven inflation, rose 1.1 per cent from a year earlier, led in part by lodging.

In a speech on Wednesday, BOJ governor Kazuo Ueda reiterated his stance to keep raising rates in response to the economy, inflation and financial conditions. Naoki Tamura, a hawkish board member, on Thursday called for a hike every few months. The BOJ delivers its next policy decision on Jul 31. BLOOMBERG