BOJ's inflation target dims as prices hold firm

The core-core inflation index, a more closely watched gauge the Bank Of Japan uses to strip away the effect of energy and fresh food costs, was up 0.2 per cent last month - a slowdown from May's 0.3 per cent gain. It undercuts the central bank's view
The core-core inflation index, a more closely watched gauge the Bank Of Japan uses to strip away the effect of energy and fresh food costs, was up 0.2 per cent last month - a slowdown from May's 0.3 per cent gain. It undercuts the central bank's view that a solid economic recovery will nudge firms into raising prices.PHOTO: REUTERS

Index that strips out energy costs slows 3 months in a row

TOKYO • Japan's annual core consumer inflation quickened slightly last month.

However, the rise was due largely to recent gains in oil costs, with prices of other goods barely picking up - a setback for the Bank Of Japan's (BOJ) mission to get inflation to 2 per cent.

The so-called core-core inflation index, which is closely watched by the BOJ because it strips away the effect of energy costs, slowed for the third straight month, undercutting the central bank's view that a solid economic recovery will nudge firms into raising prices.

The data reinforces market expectations that the BOJ will cut its inflation forecasts when it meets for a rate review on July 30-31, analysts say.

"The figures must be pretty disappointing for the BOJ because the rise in inflation was due almost entirely to energy costs. Prices of other goods aren't rising much," said Dai-ichi Life Research Institute chief economist Yoshiki Shinke.

"Consumption isn't strong, so companies are struggling to raise prices.

"While the BOJ likely won't ease policy, the hurdle for whittling down stimulus is quite high."

The nationwide core consumer price index (CPI), which includes oil products but excludes volatile fresh food prices, rose 0.8 per cent in June from a year earlier, matching a median market forecast. It followed a 0.7 per cent increase in May.

The core-core inflation index, a more closely watched gauge the BOJ uses to strip away the effect of both energy and fresh food costs, was up 0.2 per cent last month, government data showed yesterday.

That was a slowdown from the previous month's 0.3 per cent gain, a sign that soft consumption is discouraging firms from passing on rising raw material and labour costs to households.

Of the total number of items comprising core CPI, 52.2 per cent saw prices rise last month, down from 53.7 per cent in May.

"We probably won't see core-core inflation rise strongly ahead," said a government official.

Core consumer inflation slowed for two straight months before flattening in May, prompting calls from BOJ officials to conduct a thorough analysis at this month's rate review on why inflation remains stubbornly low despite solid growth.

At the meeting, the BOJ may concede that inflation could fall short of its target for as long as three more years, sources say, in what would be the strongest sign yet of acceptance that its goal cannot be reached quickly.

That would tally with a Reuters poll out yesterday that found more than 40 per cent of Japanese businesses believe it will take more than three years to reach the central bank's inflation goal of 2 per cent, and more than a quarter think the goal is impossible.

Many analysts expect core consumer inflation to hover around 1 per cent in the coming months and to slow down after a scheduled sales tax hike in October next year that is expected to undercut consumption.

REUTERS

A version of this article appeared in the print edition of The Straits Times on July 21, 2018, with the headline 'BOJ's inflation target dims as prices hold firm'. Print Edition | Subscribe