Data showed that core consumer inflation in Japan reached its highest level in four decades as companies continued to pass on rising costs to households, a sign that widening price increases could keep the central bank under pressure to reduce massive stimulus.
Months before Tuesday’s surprise adjustment to yield control policy, policymakers at the Bank of Japan discussed the potential market impact of a future exit from ultra-low interest rates, minutes from their October meeting showed Friday.
While many retailers are planning more increases in food products in the coming year, analysts say the outlook for inflation and the timing of any additional policy adjustments by the Bank of Japan are clouded by global recession risks and uncertainty about the pace of wage increases.
The hurdle for policy normalization is not low. Takeshi Minami, chief economist at the Norinchukin Research Institute, said the global economy could deteriorate in the first half of next year, making it difficult for the Bank of Japan to take steps that could be interpreted as monetary tightening.
Data on Friday showed that Japan’s core CPI, which excludes volatile fresh food but includes energy costs, rose 3.7% in November from a year earlier, matching market expectations, and extending its 3.6% rise in October.
It was the biggest rise since a 4.0% jump in December 1981, when inflation was still high from the impact of the 1979 oil shock and a booming economy.
The data showed that apart from utility bills, prices of a wide range of commodities from fried chicken and smartphones to air conditioners rose, in a sign of escalating inflationary pressures.
Many analysts expect core consumer inflation to slow near the Bank of Japan’s 2% target next year, as the underlying impact of previous fuel price hikes dissipates and the impact of government subsidies to curb electricity prices from February begins.
But the index that removes such non-recurring factors may remain high and continue to pressure the BoJ to remain vigilant for the chance of higher demand-driven inflation.
The so-called “core” index, which excludes both fresh food and energy prices, rose 2.8% in November from a year earlier, accelerating from a 2.5% increase in October.
The rise in the core index, which the Bank of Japan is closely watching as a measure of demand-driven inflation, highlights how inflationary pressure is building up in previously deflationary Japan and could continue into next year.
Research firm Teikoku Data Bank said in a report that companies already expect to raise prices for 7,152 food products in the first four months of 2023, more than double the number for the same period this year.
“It is likely that we will see a rush in price hikes next year that could be even sharper than this year,” said Teikoku Data Bank, as companies face higher labor and distribution costs.
The Bank of Japan surprised markets on Tuesday by adjusting its yield control and allowing long-term interest rates to rise further, a move that market players see as a precursor to further withdrawal from its massive stimulus programme.
Bank of Japan Governor Haruhiko Kuroda, who ends his term in April, said the bank has no intention of rolling back stimulus as inflation is set to slow to less than 2% next year.
But the October minutes showed how many of his fellow board members are shifting their attention to the risks of overrunning inflation and the prospects for stimulus withdrawal.
Given structural changes such as the shift away from globalization, past experiences in Japan may not necessarily apply. “We cannot rule out the chance of a significant run-off in inflation,” one member was quoted as saying in the October minutes.
CPI data is likely to be among the main factors the Bank of Japan will examine when it releases new quarterly inflation forecasts at its two-day policy meeting ending January 18th.
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