Tokyo inflation tops expectations, supporting case for BOJ hikes
INFLATION in Tokyo picked up speed in August, supporting the case for the Bank of Japan (BOJ) to continue raising rates at a gradual pace as the bank balances the need to support the economy.
Consumer prices excluding fresh food rose 2.4 per cent in the capital, an acceleration from the 2.2 per cent growth in July, the Ministry of Internal Affairs reported on Friday (Aug 30). The result exceeded a consensus estimate of 2.2 per cent. Tokyo’s figures are leading indicators of the national data due in September.
After the BOJ’s July 31 interest rate hike, governor Kazuo Ueda indicated his intention to raise the benchmark rate again if price trends develop in line with the bank’s projections.
At the same time, he signalled last week that he won’t rush ahead with any further policy steps as the BOJ carefully gauges the impact of unstable financial markets on the inflation outlook for the time being. He must also weigh the need to keep the economy’s slow recovery on track.
Separate data showed that the jobless rate edged higher to 2.7 per cent, while the jobs-to-applicants ratio nudged higher to 1.24, meaning there were 124 jobs available to every 100 applicants. Japan’s factory output flipped back to growth, rising 2.8 per cent in July from June, while missing the consensus call for a 3.5 per cent increase. Retail sales growth slowed to 2.6 per cent year on year in July, barely outpacing inflation.
Taken together, Friday’s data showed that the real economy and its fundamentals are continuing to recover but at a slow pace, according to Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting.
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“I don’t expect to see a very strong economic recovery that will justify an early rate hike to everybody,” Kobayashi said. “An additional rate hike this year will be difficult, and it will be January or March of next year at the earliest.”
The BOJ is widely expected to hold its settings steady when the board next decides policy on Sep 20. Most economists surveyed earlier this month predicted another rate hike some time between October and January. A former BOJ board member said the BOJ will not raise the policy rate again this year in the wake of the recent market turmoil.
The overall inflation gauge got a boost from rising energy prices, with the effect exaggerated somewhat by low readings a year ago. Electricity prices rose 24.2 per cent, accelerating from 19.7 per cent in July. Household durable goods price gains also picked up a bit.
A gauge that excludes energy and fresh food rose 1.6 per cent, accelerating a tad from July.
The gauge for service prices, which shows how inflation is spreading beyond goods and materials, rose 0.7 per cent in August, compared with a 0.5 per cent gain in July. Education subsidies in the capital have kept service prices there below the national trend.
Policymakers are hopeful that higher wages on the back of tight labour market conditions will make households more resilient to inflation. Real wages rose for the first time in 27 months in June in a bright sign after consumer inflation hovered at or above the BOJ’s target for more than two years.
Simmering frustration over rising costs of living was a factor that weighed persistently on approval ratings for Prime Minister Fumio Kishida, who decided earlier this month to step down. A leadership vote in the ruling Liberal Democratic Party set for Sep 27 will determine Kishida’s successor, who will have the option of calling a national election to secure a fresh mandate.
Kishida had sought to placate consumers by implementing a one-off tax rebate for many households in June and by re-starting the utility subsidies from August.
The government has yet to declare the economy has definitively exited deflation even after more than two years of rising prices. Candidates vying to become the nation’s next premier may lay out various plans to give the economy one more boost.
Among those who have declared they will run, Digital Minister Kono Taro has called for fiscal discipline as interest rates rise slowly. Another candidate, Takayuki Kobayashi, signalled the importance of spending for growth.
Official campaigning for the LDP race starts on Sep 12, and about 10 candidates expected to run.
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