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Headline inflation in Japan rose to 3.3 per cent in June, outpacing the US figure for the first time in eight years and underscoring how Asia’s most advanced economy is no longer an outlier in global inflation.
Price pressures in Japan, which has battled deflation for most of the past three decades, have proven to be broader and stickier than expected. This increases the pressure on the Bank of Japan, which meets next week and faces calls from investors to unwind its ultra-loose monetary policy.
Japan remains the world’s only central bank with negative interest rates, and any reversal of this strategy would have massive implications for global financial markets.
Annual inflation of the consumer price index and core CPI, which excludes fresh food, rose from 3.2 per cent in May to 3.3 per cent in June, according to data released on Friday. The rise, mainly due to higher utility bills, was in line with market expectations.
That compares with 3 per cent inflation in the US, where the Federal Reserve has raised its benchmark interest rate to between 5 and 5.25 per cent from close to zero at the start of 2022. Friday’s figures represent the first time Japan’s headline inflation has been higher than the US’s since October 2015.
The BoJ has argued that easing measures are needed to support the economy since the country’s inflation is not driven by strong underlying consumer demand and will slow as the cost of imported commodities falls.
In a sign of that scenario playing out, the so-called core-core CPI, which strips out energy and food prices and is the most similar to core CPI measures used in other countries, fell from 4.3 per cent to 4.2 per cent in the June data.
But Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, said there was uncertainty about the pace of the decline, with companies more willing to pass on higher costs to consumers and with big businesses raising wages.
“If it’s a typical cost-push inflation, prices are likely to fall dramatically once time passes, but the price trend could last for much longer than expected,” Shinke said. “With levels of 3 or 4 per cent, inflation in Japan is clearly no longer low.”
This week, BoJ governor Kazuo Ueda signalled that the central bank would maintain its easing measures at its policy meeting next week. “There is still a distance to sustainably and stably achieving our 2 per cent inflation target,” he said.
The comments sent the yen falling against the dollar as markets lowered expectations that the central bank would adjust its yield curve controls, a policy it pioneered in 2016 to cap rates on the benchmark 10-year Japanese government bonds at about zero per cent.
Still, UBS economist Masamichi Adachi said he expected the BoJ to widen the trading band on government bonds and raise its inflation outlook next week. He noted that underlying inflation had risen even if it had not hit the bank’s 2 per cent target on an ongoing basis.
In December, the BoJ said it would allow 10-year bond yields to fluctuate by 0.5 percentage points above or below its target of zero, widening from the previous band of 0.25 percentage points.