(Bloomberg) — Japan’s key inflation gauge slowed in September for the first time in five months, ahead of a central bank meeting later this month where the board is widely expected to keep the interest rate unchanged.
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Consumer prices excluding fresh food rose 2.4% from a year earlier, decelerating from 2.8% in August as government utility subsidies softened the impact of ongoing inflation, according to the Ministry of Internal Affairs Friday. The result came in slightly stronger than the consensus estimate of 2.3%.
The slowdown in price gains largely hangs on government subsidies, thus it is likely to have a limited amount of impact on the Bank of Japan’s policy path, provided there are no other signs of weakening in the trend. For Prime Minister Shigeru Ishiba, a waning of inflation may help his case as he heads into a general election on Oct. 27.
“If the subsidies are extended, it’ll bring down CPI, but it doesn’t impact the price trend itself,” said Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute. “So we shouldn’t be overly concerned about those moves. The BOJ’s decision is unlikely to change on this.”
Overall inflation slowed to 2.5% from 3.0% in August. Drops in electricity and gas prices drove the gauge lower, with the government’s subsidies knocking 0.55 percentage point off.
A deeper index excluding energy costs and fresh food prices rose to 2.1% from 2.0% in the previous month. Service prices, seen by the BOJ as a key measure to examine the price trend, gained 1.3% from a year earlier, slowing from 1.4% in August.
The BOJ is widely expected to leave the benchmark rate at 0.25% on Oct. 31. The central bank’s communication remains in focus after the BOJ came under fire for its last interest hike in July, which was followed by a global market crash shortly afterwards.
The bank has maintained its stance that it will reduce monetary easing further with additional rate hikes, if inflation develops in line with its own projections. The BOJ’s outlook will also be updated at the end of the month.
What Bloomberg Economics Says…
“The details in Japan’s September CPI report show surprisingly solid consumer price momentum powered by big pay gains and a weaker yen — all hidden below the softer headline reading, which sagged due to government subsidies for utilities.”
— Taro Kimura, economist
For the full report, click here.
Inflation may re-accelerate in the coming months if the government’s utility subsidies expire as scheduled this month. A report by Teikoku Databank also showed food companies raised the prices of 2,911 items in October.
The yen’s relative weakness is also likely to keep inflationary pressure high via import prices. The Japanese currency has lost some gains over the past few weeks against the dollar as the US economy remained resilient. It reached the 150 level against the dollar again Thursday evening.
But inflation may also be pushed lower by an upcoming economic stimulus package, funded by a larger extra budget than last year. Ishiba said the package will focus on price relief measures such as cash handouts for low-income households as he aims to shore up public support ahead of this month’s general election.
“All the political parties are proposing pork-barrel spending in their election campaigns,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “I think price measures will be continued whatever happens.”
Japan’s inflation has stayed at or above the BOJ’s 2% target for two and half years. But so far Ishiba’s government hasn’t declared an exit from deflation, and has called for a cautious judgment on the pace of the BOJ’s interest rate hikes. The new administration, which started on Oct. 1, aims to achieve wage growth beyond the pace of inflation so that households will keep spending and cope with inflation better, supporting a positive economic cycle.
This year, labor unions won the biggest wage growth in years, which along with chronic labor shortage helped paychecks increase for a broad range of workers. Still, real wages adjusted for inflation fell again in August after rising for the previous two months, and consumption remains lackluster.
–With assistance from Erica Yokoyama.
(Updates with more details, economist comments.)
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