TOKYO: Japan’s core consumer prices in December rose 4.0 per cent from a year earlier, double the central bank’s 2 per cent target, hitting a fresh 41-year high and keeping alive market expectations the central bank could phase out ultra-low interest rates.
But analysts are divided on whether the Bank of Japan (BOJ) could raise rates this year, due to uncertainty on whether wages will increase enough to offset the hit to consumption from rising living costs and keep inflation sustainably around 2 per cent.
“Companies aren’t that cautious about raising prices anymore. We might see inflation stay above the BOJ’s 2 per cent target well into autumn this year,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
“But wages are key. If inflation stays around 2 per cent and Japan sees significant wage hikes, the BOJ could normalise monetary policy. If it deems the pace of wage hike as insufficient, there’s an equal chance it will stand pat,” he said.
The December increase in the core consumer price index (CPI), which excludes volatile fresh food but includes oil costs, matched a median market forecast and followed a 3.7 per cent annual gain seen in November. It was the fastest annual rise since December 1981, when the index also rose 4.0 per cent.
The annual rise in core CPI exceeded the BOJ’s 2 per cent target for a ninth straight month, as prices rose for goods ranging from hamburgers and potato chips to air conditioners.
Core-core CPI, which strips away both fresh food and energy costs, was 3.0 per cent higher in December than a year earlier, accelerating from a 2.8 per cent gain seen in November.
A closer look at the data, however, shows that Japan has yet to face the risk of a wage-inflation spiral that has prodded US and European central banks to raise interest rates.
The main driver was energy prices, which were 15.2 per cent higher in December than a year earlier, faster than a 13.3 per cent increase seen in November.
SIGN OF SLOW WAGES GROWTH
Among components of core CPI, prices of services were up just 0.8 per cent in December on a year earlier, rising much more slowly than the 7.1 per cent gain in goods prices – a sign of still-slow wage growth.
“Supply shock is behind the recent pick-up in inflation,” said Yasunari Ueno, chief market economist at Mizuho Securities.
“It’s therefore hard to see the BOJ raising its policy rate even under a new governor and deputy governor,” who will assume their posts in April and March, respectively, he said.
Dai-ichi Life’s Shinke expects core consumer inflation to accelerate further in January, before slowing due to the effect of government subsidies aimed at curbing utility bills.
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