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(Bloomberg) — Japan’s key prices rose at a faster pace in July in the latest indication of the rising cost of living, as Bank of Japan Governor Kazuo Ueda prepares to talk about policy developments in parliament following recent market turmoil.
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Consumer prices excluding fresh food climbed 2.7% from a year earlier, accelerating from 2.6% in June, according to the ministry of internal affairs Friday. The result matched the consensus estimate. Electricity price gains accelerated to 22% after utility subsidies were paused, pushing the gauge higher. Advances in processed foods and lodging slowed.
Stickiness in the core inflation gauge points to the likelihood that the BOJ will continue to consider further interest rate increases. Ueda is set to explain the outlook for monetary policy in parliament this morning at a special hearing following a global market rout earlier this month that was partly triggered by the central bank’s rate hike at the end of July.
“We currently expect an additional rate hike in December,” said Takafumi Fujita, economist at Meiji Yasuda Research Institute. “Although inflationary pressure does not appear strong, we believe that the BOJ will continue its stance of monetary normalization.”
Economists expect the BOJ chief to dilute some of the hawkishness he showed last month as he seeks to reassure investors he won’t race ahead with rate hikes or ignore the need to maintain market stability while considering policy.
Another index that strips out energy costs in addition to fresh food prices offered a contrasting view of the deeper inflation trend as it slowed to 1.9% from 2.2%, sliding below the 2% level for the first time since September 2022.
While the pace of this more focused measure of price growth has continued to weaken over the past year, that hasn’t stopped the central bank from raising rates. Still, the slowdown below 2% may strengthen the argument for waiting for more data before raising rates again.
The BOJ has also highlighted the importance of service prices as it examines the inflation trend. They rose 1.4% from a year earlier, slowing from 1.7% in June, according to the report.
Taro Kimura, an economist at Bloomberg Economics, expected the slowdown due to the base effect from last year’s rollback of travel subsidies.
What Bloomberg Economics Says…
“Japan’s hotter July CPI was stoked by a broad base of drivers — consistent with the Bank of Japan’s view inflationary forces are widening. A cut in subsidies for utility costs was one driver. Services inflation — the BOJ’s main focus — slowed, but only due to a base effect from last year’s rollback of travel subsidies.”
— Taro Kimura, economist
For the full report, click here.
Core inflation has now stayed at or above the BOJ’s 2% target for 28 months. The BOJ raised its benchmark rates to 0.25% and said real rates are still considerably negative on July 31, indicating the scope for more hikes.
The high cost of living is a key factor that has weighed on support levels for Prime Minister Fumio Kishida. The premier last week decided to step down. The Liberal Democratic Party’s leadership election on Sept. 27 will determine who will become Japan’s next leader.
Takayuki Kobayashi, the first LDP member to officially announce his candidacy, said this week he will compile measures to counter inflation within this year if he wins the leadership race.
Thanks to the strongest wage negotiation results between businesses and labor unions in three decades earlier this year, Japan’s real wages rose for the first time in 27 months in June. Japan’s consumer spending has stayed below a pre-pandemic level through June, but gross domestic product data showed private consumption rising in the second quarter for the first time in more than a year.
(Updates with economists’ comments)
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