Japan’s Core Inflation Beats Target Again, Bank of Japan May Raise Inflation Forecast
Japan’s core inflation exceeded the Bank of Japan’s 2 percent target for the 15th consecutive month in June, indicating a continued rise in price pressures in the near future. According to data released on Friday, Japan’s national core Consumer Price Index (CPI), excluding fresh food costs, rose 3.3% year-on-year in June, slightly higher than May’s 3.2% and meeting market expectations. The main driver of this acceleration was the increase in utility bills, while prices for food and daily necessities also continued to rise.
The latest inflation figures have raised the likelihood of the Bank of Japan revising its inflation forecast for this year. The central bank is set to release its updated forecast next week and the board will discuss whether conditions are favorable to start winding down its massive stimulus program.
Policymakers are closely monitoring whether rising labor costs are fueling inflation. Data showed that service prices in Japan rose by 1.6% year-on-year in June, slightly down from May’s 1.7%. Moreover, Japan’s national core-core CPI, which excludes fresh food and fuel costs, increased by 4.2% year-on-year in June, down from 4.3% in May.
With inflation on the rise, speculation is growing that the Bank of Japan may soon phase out its controversial yield curve control (YCC) policy, criticized for distorting market pricing and squeezing financial institutions’ profit margins.
However, Bank of Japan Governor Kazuo Ueda mentioned on Tuesday that Japan still has a long way to go in achieving the central bank’s 2 percent inflation target on a sustained basis. Mitsuhiro Furusawa, a former vice-minister of international affairs at Japan’s finance ministry, noted that based on Ueda’s comments, it is unlikely that the central bank will revise its policy tools at the upcoming meeting. He added, “In the past, I thought July could be a possibility for adjusting the policy, but from the way he talks, it would be a big surprise if he switches to next week.”
It remains to be seen whether the Bank of Japan will make any significant changes to its policies in response to the sustained acceleration in core inflation.