Japan’s consumer prices rose at a faster pace than expected in May while the deeper inflation trend continued to strengthen, outcomes that could fuel speculation the central bank will raise its inflation forecasts in July and even tweak its stimulus program.
Prices excluding those for fresh food gained 3.2% from a year ago, decelerating from a 3.4% rise in April, the internal affairs ministry reported Friday. While the national data was consistent with the results of earlier figures for Tokyo showing the impact of a reduced levy on electricity prices, the reading still outpaced analysts’ forecast of a 3.1% increase.
A measure of inflation that also excludes energy continued to strengthen to hit 4.3%, showing the underlying price trend is continuing to gain momentum. The reading was the highest since 1981.
Sticky prices will likely feed into economists’ view the Bank of Japan may bump up its quarterly price forecasts in July. Some analysts see a sharp upward revision also triggering an adjustment of the BOJ’s yield curve control program.
“Today’s results make it certain that the BOJ will upgrade its inflation forecasts in July,” said Nobuyasu Atago, chief economist at Ichiyoshi Securities and a former BOJ official. “As inflation remains sticky, it’s getting harder for the BOJ to communicate why it needs to keep up its stimulus.”
The yen, which hit a fresh seven-month low against the dollar overnight, was largely unchanged around 143.1 against the greenback after initially strengthening fractionally following the result. A weaker yen will help fuel the inflation trend by raising the prices of imports.
In the latest quarterly outlook released in April, the bank sees inflation averaging 1.8% in the year ending in March. Governor Kazuo Ueda has said prices will slow below 2% toward the middle of the year. For fiscal 2025, the BOJ projects core prices rising 1.6%.
Economists are divided over whether the central bank will raise its forecasts for the coming years above 2% in July, given the potential for sparking speculation of policy change. They will probably avoid that to buy more time for change before adjusting policy, Atago said.
While the consensus view is that the BOJ is still some distance from a major policy shift, a third of economists surveyed this month see the central bank tweaking policy, likely its yield curve control, in July.
What Bloomberg Economics Says...
“Demand-led inflation the Bank of Japan wants to see is still absent — reinforcing our view that the central bank will maintain stimulus for quite a while yet.”
— Taro Kimura, economist
For the full report, click here.
The slowdown in main price gauge in May reflected a fall in electricity charges based on a technicality rather than a wider turning of the inflationary trend. Household electricity bills were already falling from last year thanks to hefty government subsidies, but dropped by 17% in May, driven by a reduction in a levy for renewable energy development.
But elsewhere in the CPI basket prices continued to gain strength. Again, processed food was the largest contributor rising 9.2%, the biggest jump since 1975, and contributing around 2.1 percentage points to the overall inflation figure. Service prices also kept rising at the fastest pace since 1995, excluding tax hike impacts.
About 3,500 food products are expected to go up in price in both June and July, according to a Teikoku Databank report that points to further upward pressure from these items. Still, the report suggests consumers are becoming increasingly weary of recent price hikes, a factor that may slow the trend over the second half of the year.
Going ahead, utility rates will continue to have a significant impact on Japan’s price trends. Power rates are expected to start going up again by as much as 42% from June. The government subsidies currently holding down electricity prices by around 20% are also set to be halved in September.
“Given the government’s basic policy of not wanting to distort markets too much amid transition in the energy sector, the government may not choose to aggressively extend the subsidy program,” said Kenta Domoto, a consultant at Mitsubishi Research Institute.
Decisions regarding additional support for utility costs are a key issue for Prime Minister Fumio Kishida, who may want to optimize his timing for a potential election later this year.
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Kishida said last week he isn’t thinking of dissolving parliament for now, fueling chatter he may call an election in the fall. With inflation still high, taking away relief measures in the coming months may cause voter discontent.
With a July election off the cards, the BOJ now has a window to make tweaks to YCC if needed, but will likely avoid any major change that could disrupt markets until any poll is out of the way, economists said.
“For major policy changes, the BOJ will find it easier to do them next year assuming an election takes place in the fall,” Atago said.
--With assistance from Jon Herskovitz, Yoshiaki Nohara and Toru Fujioka.
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