Japan prices fail to make more progress toward distant BOJ goal


Gains in Japan’s key consumer prices failed to accelerate toward the Bank of Japan’s target in December, highlighting the ongoing weakness in the economy’s inflation pulse in stark contrast to its global peers.

Consumer prices excluding fresh food rose 0.5% in December from a year earlier, with cheaper household appliances and smaller gains in hotel prices outweighing the impact of higher energy costs, the internal affairs ministry said Friday. Economists had expected a 0.6% gain.

The subdued inflation reading is likely to further cool speculation that the BOJ may take steps to adjust policy in light of price increases. Gov. Haruhiko Kuroda said earlier this week that the start of a normalization of policy is “absolutely not” on the table.

While the central bank said that price risks are balanced for the upside and downside for the first time since 2014, it still only forecast inflation of around 1% through early 2024.

“We’re basically not seeing any signs that general prices are beginning to rise. At the moment it’s all coming from gains in limited areas such as energy and fresh food,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.

“Kuroda’s comments that it’s no time to think about normalization seems right to me. We’re far from getting to the BOJ’s price goal,” he added.

Friday’s data showed that while household electricity bills jumped 13.4% for the biggest increase since March 1981, those gains were canceled out by a drop in the price of home-use consumer durables and weaker gains in hotel prices.

The figures follow reports from the United States and the United Kingdom earlier this month showing the highest inflation in decades, outcomes that are likely to feed into further divergence in monetary policy to come.

“Looking ahead, we expect core inflation to slow slightly in the first quarter of 2022. Base effects will probably overcome upward pressure from elevated energy prices and a weaker yen,” said Yuki Masujima, an economist at Bloomberg Economics. “A rapid increase in the virus infection points to downside risks for service prices.”

Still, even with muted price gains, Kuroda said it remains important to watch how households and companies react to increasing price pressures arriving from offshore given their entrenched deflationary mindset.

The highest gains in input prices for Japanese businesses in four decades suggest that some passing of higher costs onto consumers is becoming more inevitable.

The Nisshin Oillio Group, a cooking oil producer, announced price increases of up to 13%, joining an increasing number of Japanese firms raising their price tags. Almost 90% of consumers have noticed a price increase in their daily necessities, according to a Cabinet Office survey this week.

The gap between government data and household perceptions probably stems from a significant downward contribution to the overall consumer price index from a 54% cut in cell phone fees. The cheaper mobile running costs shaved 1.5 percentage point from overall prices in December.

Japan’s inflation is likely to weaken in January as the effect of earlier government travel discounts disappear before jumping again in April when the impact of the cheaper phone charges starts to drop out of the data.

Still, economists see the expected price gains in the spring as unsustainable.

“I don’t think inflation will be able to hold above 2% even if it touches the level,” said Nobuyasu Atago at Ichiyoshi Securities Co. “For that to happen, the price trend excluding energy and special factors will have to improve. That won’t happen unless wages and prices start rising hand in hand.”

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