Japan’s inflation hovers well above BOJ’s goal even as it slows

THE pace of Japan’s consumer inflation stayed well above the Bank of Japan’s target even as price growth moderated, supporting market speculation that the central bank will hike its benchmark interest rate again this year. 

Consumer prices excluding fresh food rose 3.1 per cent from a year earlier in July, slowing from a 3.3 per cent gain in the previous month, the Ministry of Internal Affairs and Communications reported on Friday. The median estimate of economists was for a gain of 3 per cent, with expectations there would be a drag from energy prices after they spiked a year earlier.

A deeper price measure that also strips out energy advanced 3.4 per cent, unchanged from the previous period and matching the consensus estimate.

Friday’s data suggest inflation remains relatively sticky. The figures come about a week after US Treasury Secretary Scott Bessent took the unusual step of suggesting the BOJ is mishandling the fight against inflation, saying in an interview with Bloomberg TV that “they’re behind the curve.”

Market bets on a BOJ hike have ramped up in recent weeks, helping push bond yields higher. 

The slowdown in core CPI was largely expected among forecasters after energy prices jumped 12 months ago due to the end of the government’s subsidy programme. Oil prices were also down by about 10 per cent last month compared with levels a year ago. 

The price of rice, a primary driver of inflation this year, rose 90.7 per cent from 12 months ago, with the increase moderating from 100.2 per cent in June.

The skyrocketing cost of the staple food has caused consternation across the nation. Policymakers are expecting to see a slowdown in annual comparisons in coming months after prices began their precipitous ascent last autumn, although record heat could reduce production, causing more shortages.

Food prices excluding fresh food rose 8.3 per cent, the fastest pace since September 2023, while service prices rose 1.5 per cent, the same pace as in the previous month.

The public’s deep discontent over soaring costs of living played a key role in handing Prime Minister Shigeru Ishiba and his ruling coalition a historic setback in an election last month.

Having lost majorities in both chambers of parliament, the premier now faces demands to resign from some lawmakers. Analysts are watching to see if Ishiba will seek to shore up support by promising more fiscal spending to mollify consumers.

At the July monetary policy meeting, BOJ Governor Kazuo Ueda’s board raised its price projection more than expected for this fiscal year in its quarterly report, citing the impact of food inflation. The BOJ is largely expected to stand pat on rates when it next sets policy on Sept 19.

Traders see about a 51 per cent chance of a BOJ rate hike by the end of October, as reflected by movements in the overnight swap index. That compares with around a 42 per cent likelihood showing in the market a month ago.

Benchmark 10-year bond yields hit the highest level since 2008 Thursday owing partly to speculation that the policy rate is headed higher. BLOOMBERG