Japan's core inflation slows, BOJ unlikely to tighten policy

August 18, 2023 (MLN): Japan's core consumer prices slowed in July, supporting expectations the Bank of Japan (BOJ) will be in no rush to phase out monetary easing, even as inflation remains stubbornly above the central bank's target, as Reuters reported.

The 3.1% rise in the core consumer price index (CPI), which includes oil products but excludes volatile fresh food prices, matched a median market forecast, following a 3.3% increase the previous month. It held above the BOJ's 2% inflation target for the 16th straight month.

The so-called core-core inflation index, which excludes fresh food and energy prices and is closely watched by the BOJ as a better gauge of trend inflation, rose 4.3% year-on-year in July, accelerating from the previous month.

The central bank argues that wage pressures have yet to build up enough to warrant a fresh tweak to the ultra-loose monetary stance.

Still, analysts say an acceleration in service-led inflation is a positive sign that demand-side inflation, which the BOJ is looking to stoke, maybe building.

"The data confirmed that price pressures are rising in the service sector such as accommodation as well as food, while import inflation including energy is calming down," said Takeshi Minami, chief economist at Norinchukin Research Institute.

Gabriel Ng, economist at Capital Economics, said the key question is whether services inflation can pick up the baton.

"With unit labor costs barely rising and consumer spending starting to falter as real incomes are falling sharply, we doubt that it will," said Ng.

"Accordingly, we still expect the Bank of Japan to keep its short-term policy rate unchanged for the foreseeable future."

Food costs were among the major contributors to overall inflation due to elevated prices of raw materials.

Copyright Mettis Link News