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Japan’s inflation data for August 2023 paints a picture of continued price pressures on its economy. Core consumer prices in Japan increased by 3.1% year-on-year last month, compared to the median economist forecast of 3%. This marked the 17th consecutive month that inflation has remained above the Bank of Japan’s (BoJ) 2% inflation target.
Notably, the core consumer price index (CPI), which excludes fresh food items, continued its upward trend for the 24th consecutive month. Additionally, the core-core CPI, excluding energy and fresh food prices, remained stable at 4.3% compared to the previous month.
Prices of foods, excluding perishables, were a significant driver of Japan’s inflation, surging by 9.2% in August. Meanwhile, prices of household durable goods experienced a 3% increase during the same period. All in all, goods prices, excluding fresh food, gained 4.1%, easing from a 4.3% rise the previous month.
In contrast, service prices saw a more moderate year-on-year rise of 2.5%. Electricity and gas bills fell as the government continued subsidies to reduce pressure on families. However, within the service sector, specific segments, such as restaurants and entertainment-related services, demonstrated an upward trajectory in prices.
“Private service prices such as entertainment have risen notably for more than a couple of months, with increases in foreign tourism adding upside pressure. In addition, pipeline prices such as producer prices and import prices rose mostly due to higher commodity prices,” said ING Investment Management.
In a sharp contrast to the inflation data, another report released on the 8th of September revealed that real wages, (adjusted for inflation), saw a 16th consecutive monthly decline in July. Nominal cash earnings lagged behind core consumer inflation by 1.8 percentage points.
BoJ keeps monetary policy unchanged
After Japan’s August inflation data was released, BoJ, in its meeting on September 22, announced its decision to keep its monetary policy unchanged, reaffirming its commitment to ultra-loose measures.
“The Bank of Japan (BoJ) left short-term policy rates at -0.1% and long-term rates around 0% at its September policy meeting…However, the BoJ’s confusing communication has fuelled speculation about the possible end of the negative interest rate policy (NIRP) within the next six months,” said Oxford Economics.
“Regardless of the timing, we believe that the end of NIRP will have limited impact on bank lending rates and the real economy…We see little chance of a rise in the short-term policy rate given the poor inflation prospects,” the global economic researcher added.
Furthermore, the central bank has decided to keep its yield curve control (YCC) policy unchanged. The central bank also maintained the desired range for fluctuations in 10-year bond yields, aiming for a margin of around plus or minus 0.5 percentage points.
“If inflation, accompanied by the wages goal, is in sight, then the BoJ will mull an end to the YCC and a rate shift,” said Kazuo Ueda, Governor of BoJ, at a press conference on Friday.
Besides, the BoJ has reaffirmed its commitment to purchase 10-year Japanese Government Bonds (JGB) at a rate of 1% daily through fixed-rate market operations. In 2023, the BoJ’s bond-buying activity surged, averaging 10 tn yen ($67.7 bn) in Japanese Government Bonds (JGBs) per month. This accelerated purchasing pace signifies a historical high as the bank strives to keep 10-year bond yields within its preferred range despite persistent inflationary pressures.
“With extremely high uncertainties surrounding economies and financial markets at home and abroad, the Bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions,” said BoJ.
