Consumer price inflation in Japan hits a new 41-year high

Core consumer prices in Japan rose 4% in December from a year earlier, doubling the central bank’s 2% target, hitting a new 41-year high and keeping alive market expectations that the central government of Japan bank to phase out ultra-low interest rates.

Still, analysts are divided on whether the Bank of Japan can hike rates this year amid uncertainty about whether wages will rise enough to offset the blow consumers take from rising cost of living and maintain the inflation sustainably around 2%.

“Companies are no longer so cautious about raising prices. We could see inflation remain above the Bank of Japan’s 2% target through the fall of this year,” he says. Yoshiki Shinkechief economist of the Dai-ichi Life Research Institute.

“But wages are key. If inflation stays around 2% and Japan sees significant wage increases, the Bank of Japan could normalize its monetary policy. If the bank finds the pace of wage increases insufficient, there is the same chance that he remains impassive”. she said.

December’s rise in a core consumer price index (CPI) that excludes volatile fresh foods but includes oil costs was in line with the market median forecast and follows the 3.7% annual increase of November. It was the largest annual increase since December 1981, when the index also rose 4.0%.

The annual increase in core CPI exceeded the Bank of Japan’s 2% target for the ninth consecutive month, as prices of items ranging from hamburgers and fries to air conditioners soared.

Core CPI excluding fresh foods and also energy costs were 3.0% higher in December than a year earlier, accelerating the 2.8% increase recorded in November.

However, a closer look at the data shows that Japan does not yet face the risk of a wage inflation spiral that has prompted central banks in the US and Europe to hike interest rates.

The main driver was energy prices, which rose 15.2% in December year-on-year, up from 13.3% in November.

Signs of slow wage growth

Among the main components of the CPI, prices of services increased by only 0.8% in December compared to the previous year, much less than the 7.1% increase in the prices of goods, a sign of still sluggish growth in wages.

Yasunari Uenochief market economist at Mizuho Securities, says “supply shock is behind recent spike in inflation.”

“Therefore, it is difficult for the Bank of Japan to raise its key interest rate, even with a new governor and deputy governor,” who will take office in April and March, respectively.

Dai-ichi Life’s Shinke expects core consumer inflation to continue to accelerate in January, before slowing due to the effect of government subsidies to help with energy bills.

The base effect of last year’s sharp rise in consumer prices will also slow the rate of increase in inflation later this year, analysts say.

The Bank of Japan maintained extremely loose monetary policy on Wednesday but raised its inflation forecast in its new quarterly projections as firms continued to pass rising commodity costs on to households.

The Governor of the BOJ, Haruhiko Kurodawhose term expires in April, he stressed the need to maintain extremely accommodative monetary policy until wages rise further, exchanging recent cost-driven inflation for inflation driven by robust domestic demand.

Reflecting intensifying labor shortages and accelerating inflation, more and more companies are announcing pay hike plans, including the parent company of casualwear giant Uniqlo.

A Reuters poll on Thursday showed more than half of large Japanese companies planned to raise wages this year, even though smaller companies, which employ the vast majority of Japanese workers, are less able to afford wage hikes.

Many market players expect the central bank to phase out yield curve control, a policy under which it caps long-term interest rates at around zero, although there is no consensus on how soon this could happen.

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