TOKYO: Japan’s core consumer inflation quickened to 2.8 per cent in August to hit the fastest annual pace in nearly eight years, data showed on Tuesday (Sep 20), as pressures from higher raw material costs and a weak yen broadened.
While core consumer inflation has exceeded the central bank’s 2 per cent target for five straight months, the Bank of Japan (BOJ) is unlikely to raise interest rates any time soon as wage and consumption growth remain weak, analysts say.
The data highlights the dilemma the BOJ faces as it tries to underpin a fragile economy by maintaining ultra-low interest rates, which in turn are fuelling an unwelcome slide in the yen that is driving up households’ cost of living.
The rise in the nationwide core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, was slightly bigger than a median market forecast for a 2.7 per cent increase and followed a 2.4 per cent gain in July. It was the fastest pace of rise since October 2014.
The so-called “core core” index, which strips away both fresh food and energy costs, rose 1.6 per cent in August from a year earlier, accelerating from a 1.2 per cent gain in July and marking the fastest annual pace since 2015.
The core core index is closely watched by the BOJ as a gauge of how much of the inflationary pressure is driven by domestic demand.
Headline inflation hit 3.0 per cent in August, the highest since 1991, underscoring the pain consumers are suffering from rising living costs.
“Headline inflation jumped in August to yet another high since 1991 and it still has a stretch higher to climb. That said, the Bank of Japan will remain steadfast in maintaining its ultra-easy monetary policy,” said Darren Tay, Japan economist at Capital Economics.
Once welcomed for giving exports a boost, the yen’s weakness has become a headache for Japanese policymakers because it hurts retailers and consumers by inflating the already rising prices of imported fuel and food.
The world’s third-largest economy expanded an annualised 3.5 per cent in the second quarter, stronger than the preliminary estimate. But its recovery has been slower than many other countries as a resurgence in COVID-19 infections, supply constraints and rising raw material costs weighed on consumption and output.
While inflation is still modest compared with many other advanced nations, a global slowdown and high energy prices are clouding the outlook. The BOJ has pledged to keep interest rates ultra-low and remain an outlier in a global wave of monetary policy tightening.