Japan's inflation hits 31-year high, creating headaches for BOJ

Consumer prices, excluding fresh food and energy, gained 1.6 per cent. PHOTO: BLOOMBERG

TOKYO - Japan's inflation quickened to the fastest pace in more than three decades excluding tax hike distortions, creating headaches for the central bank this week as it seeks to explain why it needs to continue with monetary stimulus when inflation is far above its 2 per cent goal.

Consumer prices excluding fresh food rose 2.8 per cent in August from a year ago, the Internal Affairs Ministry reported on Tuesday. Analysts had forecast a 2.7 per cent gain. It was the strongest reading since 1991, barring the effect of sales tax increases.

Rising energy and processed food costs continued to account for most of the year-on-year increase, while higher electricity prices and a smaller drag from mobile phone fees contributed to the acceleration.

Despite the faster pace of inflation, the report is unlikely to prompt the Bank of Japan (BOJ) to change its policy on Thursday. Central bank governor Haruhiko Kuroda has repeatedly said the bank will keep interest rates at rock-bottom levels until solid wage gains make inflation more sustainable.

Mr Kuroda's resolve to stick with stimulus has positioned the BOJ as an outlier among central banks. The Federal Reserve, the Bank of England and the Swiss National Bank are among those likely to raise interest rates this week, leaving the BOJ looking even more isolated with its policy stance.

"The current cost-push inflation is bad for consumers, but the BOJ will keep easing, hoping it will eventually turn into positive inflation," said economist Yuichi Kodama at Meiji Yasuda Research Institute.

The central bank's policy will not change until Mr Kuroda's term ends as "this is the last, big opportunity" for him to truly revive inflation, he said.

But as price gains spread beyond energy items, pressure is mounting on the bank to justify the need for its ongoing stimulus. Consumer prices, excluding fresh food and energy, gained 1.6 per cent.

The prices of 6,532 food items are expected to rise in October, according to a Teikoku Databank survey, compared with 2,493 items in August and 2,424 items in September.

Analysts are raising their forecasts after the recent rapid yen slump. Norinchukin Research Institute chief economist Takeshi Minami expects recent yen moves to keep inflation elevated for longer than currently expected.

While the BOJ stands pat, the United States Federal Reserve has aggressively raised interest rates to cool inflation, and another jumbo hike is expected hours before the BOJ's decision this week.

The policy dichotomy has helped the yen fall to fresh 24-year lows versus the US dollar, making energy and food imports more expensive for resources-poor Japan.

Prime Minister Fumio Kishida has let the BOJ stay on course under Mr Kuroda, whose term ends in April. While supporting the central bank's decisions, the Premier has used government spending and price caps to manage the impact of inflation on businesses and households.

The yen's fall has helped Japanese companies book the most profits since 1954 by inflating their overseas earnings when brought home. But the windfall has yet to lead to robust wage gains for workers, making households vulnerable to inflation.

As for the yen, Mr Kishida said that Japan should take advantage of its weakness and bring back more corporate manufacturing bases and lure foreign tourists. Yet his ministers, including Finance Minister Shunichi Suzuki, have stepped up warnings about the yen when it slid to almost 145 per dollar this month.

"If the yen falls further, the government may try to intervene in foreign exchange markets, but that is a tough option because the US is unlikely to give an OK," said Meiji Yasuda's Mr Kodama. "Japan has no choice but to wait until the US economy peaks out and the yen's decline takes a pause." BLOOMBERG

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