Japan’s core consumer inflation hit a new four-decade high as businesses continued to pass on rising costs to households, data showed, a sign that price hikes could be spreading and keeping the central bank under pressure to scale back massive stimulus measures.
Months before Tuesday’s surprise change in yield control policy, Bank of Japan (BOJ) policymakers had been discussing the potential market implications of a future exit from ultra-low interest rates, minutes of its October meeting showed on Friday.
While many retailers are planning more food wage increases next year, the risk of a global recession and uncertainty over the pace of wage increases are ratcheting up the BOJ’s inflation outlook and timing of further policy changes, analysts say.
“The hurdle for policy normalization is not low. The global economy could deteriorate in the first half of next year, making it difficult for the BOJ to take steps that could be interpreted as monetary tightening,” said Takeshi Minami, chief economist at the Norinchukin Research Institute.
Japan’s key consumer price index (CPI), which excludes volatile fresh food but includes energy costs, rose 3.7% year on year in November, data showed on Friday, in line with market forecasts and up from a 3.6% rise. recovered in October.
This was the largest rise since a 4.0% rise in December 1981 when inflation was still high due to the impact of the 1979 oil shock and a booming economy.
Aside from utility bills, the prices of a wide range of goods, from fried chicken to smartphones to air conditioners, rose, signaling mounting inflationary pressures, the data showed.
Many analysts expect core consumer inflation to slow near the BOJ’s 2% target next year as the base effect of past fuel price spikes fades and the impact of government subsidies to contain power prices kick in from February.
But an index that excludes such one-offs could remain elevated, putting pressure on the BOJ to stay alert to the possibility of a demand-driven rise in inflation.
The so-called “core-core” index, which excludes both fresh food and energy prices, rose 2.8% yoy in November, accelerating from a 2.5% rise in October.
The rise in the Core-Core Index, which the BOJ is closely monitoring as a measure of demand-driven inflation, shows how inflationary pressures are building in once-deflation-prone Japan and could persist well into next year.
Businesses are already expecting to increase the prices of 7,152 foods in the first four months of 2023, more than double the rate for the same period this year, research firm Teikoku Data Bank said in a report.
“We’re likely to see an onslaught of price hikes next year, which could be more intense than this year,” as companies face rising labor and distribution costs, Teikoku Data Bank said.
The BOJ stunned markets on Tuesday by adjusting its yield controls and allowing long-term interest rates to rise further, a move market participants see as the prelude to another rollback of its massive stimulus program.
BoJ Governor Haruhiko Kuroda, whose term ends in April, said the bank has no intention of withdrawing stimulus as inflation is expected to fall below 2% next year.
But the October minutes showed how many of his fellow board members are turning their attention to the risk of inflation exceeding and the prospect of a stimulus withdrawal.
“Given structural changes such as a move away from globalization, past experience in Japan may not necessarily be accurate. We cannot rule out the possibility of a large inflation overshoot,” a member was quoted as saying in the October minutes.
The CPI data is likely to be among the key factors the BOJ will consider when it produces new quarterly inflation forecasts at a two-day policy meeting ending Jan. 18.