Japan inflation speeds up, raising risk of more BOJ shocks

Core consumer inflation hit a fresh 40-year high of 3.7 per cent in November. PHOTO: AFP

TOKYO – Japan’s inflation has further accelerated to the fastest pace since 1981, an outcome which may fuel speculation that the Bank of Japan (BOJ) will surprise markets again with further policy changes in January. 

Core consumer inflation hit a fresh 40-year high of 3.7 per cent in November as companies continued to pass on rising costs to households, data showed on Friday, a sign that price increases are spreading to broader sectors of the economy.

The increase casts doubt on the BOJ’s view that recent cost-push inflation will prove temporary and may keep alive market expectations that the Japanese central bank will further roll back its massive stimulus in 2023, analysts say.

The year-on-year increase in Japan’s core consumer price index, which excludes volatile fresh food but includes energy costs, matched a median market forecast and followed a 3.6 per cent rise in October.

It was the biggest rise since a 4 per cent jump in December 1981, when inflation was still high from the impact of the 1979 oil shock and a booming economy.

The so-called “core-core” index, which strips away both fresh food and energy prices, rose 2.8 per cent in November from a year earlier, accelerating from a 2.5 per cent increase in October.

The rise in the core-core index, which the BOJ closely watches as a gauge of demand-driven inflation, highlights how inflationary pressure is building in once deflation-prone Japan and could persist well into 2023.

Many analysts expect the BOJ to upgrade its present forecast, made in October, for core consumer inflation to slow to 1.6 per cent in the next fiscal year after hitting 2.9 per cent in the current fiscal year ending in March 2023.

Japan’s economy unexpectedly shrank an annualised 0.8 per cent in the third quarter as global recession risks and higher import costs weighed on consumption and businesses.

While analysts expect growth to have picked up in the current quarter, there is uncertainty about whether wages would rise enough to compensate households for the increased cost of living and underpin consumption.

The BOJ stunned markets on Tuesday by tweaking its yield control and allowing long-term interest rates to rise more, a move market players see as a prelude to a further withdrawal of its massive stimulus programme.

BOJ governor Haruhiko Kuroda, whose term ends in April, has said the bank had no intention to roll back stimulus as inflation was set to slow below 2 per cent in 2023. REUTERS, BLOOMBERG

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