Japan inflation hovers at 2-year low as BOJ easing talk grows

Overall, Japan's consumer prices rose 0.5 per cent in July, weaker than economists' median forecast of 0.6 per cent.
Overall, Japan's consumer prices rose 0.5 per cent in July, weaker than economists' median forecast of 0.6 per cent.PHOTO: ZUJI

TOKYO (BLOOMBERG) - Japan's key consumer prices continued to rise at the same pace in July, amid increasing speculation that the Bank of Japan may ramp up its stimulus as early as next month.

Prices excluding fresh food rose 0.6 per cent in July from a year earlier, matching economists' median estimate, according to official data on Friday (Aug 23). The downward impact of sharper falls in gasoline costs was canceled out by firmer mobile phone handset prices.

A stubbornly low inflation rate makes it harder for the BOJ to argue it's slowly but steadily making progress toward its 2 per cent inflation target.

Price growth is expected to slow further in coming months as a result of lower oil prices and government measures to make pre-school education free.

Some BOJ watchers see a growing chance of Japan's central bank ramping up its stimulus measures as early as September given a gloomier economic outlook that is likely to prompt Federal Reserve and European Central Bank action, moves that could strengthen the yen.

"At this moment, a major concern for the central bank in Japan is the exchange rate. If the BOJ admits they are no longer able to achieve the 2 per cent inflation target, that might trigger the yen's appreciation," Sayuri Shirai, a visiting researcher at the ADB Institute and a former BOJ board member, told Bloomberg TV.

Still, Prime Minister Shinzo Abe's government appears relatively comfortable with recent tepid price growth, given its concerns that a sales tax increase in October will squeeze household budgets over the following months.

"Looking forward, inflation is likely to ease toward Q4, excluding effects of a sales-tax hike in October. We expect core inflation - the BOJ's main target - to remain around 0.5 per cent (ex tax effects) in Q4," said Bloomberg economist Yuki Masujima.

Overall, Japan's consumer prices rose 0.5 per cent in July, weaker than economists' median forecast of 0.6 per cent and the June reading of 0.7 per cent.

Stripping out energy and fresh food, consumer prices climbed 0.6 per cent, better than a 0.5 per cent estimate.

Gasoline prices fell 4.3 per cent, pulling down the overall price index by 0.1 percentage point. While mobile phone fees also continued to weigh on inflation, handset prices didn't drag heavily as in previous months.