(Bloomberg) — Japan’s main inflation gauge fell for the first time in five months in September, ahead of a central bank meeting later this month where the board is widely expected to keep interest rates unchanged.
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Consumer prices excluding fresh food rose 2.4% from a year earlier and fell from 2.8% in August as government subsidies softened the impact of persistent inflation, the Interior Ministry said on Friday. The result was slightly stronger than the consensus estimate of 2.3%.
The slowdown in price increases depends largely on government subsidies and is thus likely to have a limited impact on the Bank of Japan’s policy path, provided there are no other signs of the trend weakening. For Prime Minister Shigeru Ishiba, easing inflation could help his case as he heads into the Oct. 27 general election.
“If the subsidies are extended, the CPI will fall, but this will not affect the price development itself,” said Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute. “So we shouldn’t worry too much about these movements. The BOJ’s decision is unlikely to change this.”
Headline inflation slowed to 2.5% from 3.0% in August. Declines in electricity and gas prices pushed the gauge down, with government subsidies falling by 0.55 percentage points.
A deeper index excluding energy costs and fresh food prices rose to 2.1% from 2.0% in the previous month. Services prices, which the BOJ sees as a key benchmark for examining price developments, rose 1.3% from a year earlier, down from 1.4% in August.
The BOJ is widely expected to leave the benchmark interest rate at 0.25% on October 31. The central bank’s communication remains timely after the BOJ came under fire for its last rate hike in July, which was followed shortly after by a global market crash.
The bank maintains its position that it will further reduce monetary easing with additional interest rate increases 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, driven by big wage gains and a weaker yen – all hidden beneath softer headlines, which slumped due to government utility subsidies.”
– Taro Kimura, economist
For the full report, click here.
Inflation could accelerate again in the coming months if government subsidies for utilities expire as planned this month. A report from Teikoku Databank also showed that food companies increased prices on 2,911 items in October.
The relative weakness of the yen is also likely to keep inflationary pressures high through import prices. The Japanese currency has lost some gains against the dollar in recent weeks as the US economy remained resilient. On Thursday evening, the currency again reached the level of 150 against the dollar.
But inflation could also be pushed lower by an upcoming economic stimulus package, financed by a larger additional budget than last year. Ishiba said the package will focus on price-reducing measures such as cash benefits for low-income households as he looks to strengthen public support ahead of this month’s general election.
“All political parties propose pork barrel spending in their election campaigns,” said Takeshi Minami, chief economist at the Norinchukin Research Institute. “I think the price measures will continue no matter what happens.”
Japanese inflation has remained at or above the BOJ’s 2% target for two and a half years. But so far, Ishiba’s government has stopped short of declaring an end to deflation and called for a cautious assessment of the pace of the BOJ’s rate hikes. The new government, which took office on October 1, aims to achieve wage growth above the pace of inflation, allowing households to continue spending and better manage inflation, supporting a positive economic cycle.
This year, unions achieved the biggest wage growth in years, which along with chronic labor shortages, have helped boost paychecks for a wide range of workers. Still, inflation-adjusted real wages fell again in August, after rising over the past two months, and consumption remains lackluster.
–With help from Erica Yokoyama.
(Updates with more details, comments from economists.)
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