Japan's inflation picks up as BOJ chief prepares for hearing

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(Bloomberg) — Major prices in Japan rose faster than expected in July, another sign of rising living costs as Bank of Japan Governor Kazuo Ueda prepares to address parliament about policy developments following recent market turmoil.

Consumer prices excluding fresh food rose 2.7 percent year-on-year, up from 2.6 percent in June, the Interior Ministry said on Friday. The result was in line with the consensus estimate. Electricity price increases accelerated to 22 percent after utility subsidies were suspended, pushing the indicator up. Price increases in processed food and accommodation slowed.

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The stickiness of the core inflation index suggests the BOJ will consider further rate hikes. Ueda will explain the outlook for monetary policy at a special hearing in parliament this morning, following a global market slump earlier this month, partly triggered by the central bank's interest rate hike in late July.

“We currently expect another rate hike in December,” said Takafumi Fujita, economist at the Meiji Yasuda Research Institute. “Although inflationary pressures do not appear to be strong, we believe the BOJ will continue its path of monetary policy normalization.”

Economists expect the BoJ chief to soften his hawkish stance from last month, seeking to reassure investors and not to ignore premature interest rate hikes or the need to maintain market stability in his policy considerations.

Another index, which excludes energy costs as well as fresh food prices, offered an opposite picture of the stronger inflation trend: it slowed from 2.2% to 1.9%, slipping below the two percent mark for the first time since September 2022.

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Although the pace of this more targeted measure of price growth has continued to ease over the past year, that has not stopped the central bank from raising interest rates. Still, the slowdown below 2% may strengthen the argument for waiting for more data before raising rates again.

The BOJ also highlighted the importance of services prices in its analysis of inflation trends. According to the report, they rose 1.4 percent year-on-year, down from 1.7 percent in June.

Taro Kimura, an economist at Bloomberg Economics, expected the slowdown due to the base effect from last year's cut in travel subsidies.

What Bloomberg Economics says…

“Japan's higher consumer price index in July was fueled by a broad base of drivers – consistent with the Bank of Japan's view that inflationary forces are increasing. One of the causes was a cut in utility subsidies. Inflation in services – the BOJ's main focus – slowed, but only due to a base effect from the cut in travel subsidies last year.”

— Taro Kimura, economist

Click here to view the full report.

Core inflation has now been at or above the BOJ's target of 2% for 28 months. The BOJ raised its benchmark interest rate to 0.25% and said real interest rates were still significantly negative as of July 31, suggesting room for further increases.

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The high cost of living is a key factor that has dented support for Prime Minister Fumio Kishida, who decided to resign last week. The election of the Liberal Democratic Party's chairman on September 27 will determine who will be Japan's next leader.

Takayuki Kobayashi, the first LDP member to officially announce his candidacy, said this week that he would take measures to combat inflation if he won the party's chairmanship election later this year.

Thanks to the strongest wage negotiations between companies and unions in three decades earlier this year, Japan's real wages rose in June for the first time in 27 months. Japan's consumer spending remained below pre-pandemic levels through June, but gross domestic product data showed that private consumption rose in the second quarter for the first time in more than a year.

(Updated with comments from economists)

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