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Japan’s core inflation eases, supporting the belief that the BOJ will maintain its current stance.

ReutersAugust 18, 2023

Japan’s Core‌ Consumer‌ Prices Slow in July

By ⁤Tetsushi Kajimoto

TOKYO (Reuters) – Japan’s core consumer prices slowed in July, supporting expectations the Bank of Japan (BOJ) will be in ‍no rush ⁤to phase out monetary easing, even as inflation remains stubbornly ⁣above the central bank’s target.

The 3.1% rise ⁣in⁣ the ‍core consumer price index (CPI), which‍ includes⁢ oil products but ⁤excludes volatile fresh food prices, matched ‍a median market forecast, following a 3.3% increase in the previous month. It held above the BOJ’s 2% inflation target⁤ for the 16th straight month.

The so-called core-core inflation index, which⁣ excludes fresh‌ food and ‌energy prices and is closely watched by the BOJ as a better gauge of trend inflation, rose 4.3% year-on-year in July, accelerating from the previous month.

The central bank argues that wage pressures have ⁣yet to build up enough to warrant a fresh⁤ tweak to⁢ the ultra-loose monetary stance.

Still,‍ analysts say an acceleration in service-led⁤ inflation is a positive sign that⁤ demand-side⁤ inflation, which the BOJ is looking⁢ to stoke, may be ⁢building.

“The data confirmed that price pressures are rising in service-sector such⁣ as accommodation as well ‌as food, while⁤ import inflation including energy⁣ is calming⁣ down,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

Gabriel Ng, economist at Capital Economics, said‍ the key question is whether services‌ inflation ‍can pick up the baton.

“With unit labour costs barely ⁣rising ⁢and consumer spending starting to falter as real incomes are falling sharply, ‍we doubt that it will,” said Ng.

“Accordingly, we still expect‌ the Bank of Japan to‍ keep its ⁤short-term policy rate unchanged for the foreseeable future.”

Food costs were among the major contributors ⁢to the overall inflation due to elevated prices of raw materials.

The ⁣data comes after the BOJ’s closely watched policy meeting⁤ late last month in which the central⁤ bank tweaked monetary policy to allow the 10-year ⁢bond yield cap to move more flexibly.

BOJ Governor Kazuo Ueda has stressed the need to keep policy ultra-loose until‍ cost-push inflation ‍shifts into one driven by robust ⁢domestic demand ‍and higher wage growth.

Under the BOJ’s yield curve control, the bank guides short-term interest⁣ rates ‍at -0.1% and buys huge amounts of government bonds to cap the 10-year bond yield around 0% as⁣ part of efforts to fire up inflation to its 2% target.

(Reporting by Tetsushi‌ Kajimoto. Editing by Sam Holmes)