Something has disappeared from the Bank of Japan’s statements on high inflation: the word “temporary”.
No longer signaling that robust price increases will be short-lived, the central bank may soon go further to say that they will become faster than expected for the rest of this year, in part due to the yen falling to lows. 24-year hollow, said three sources familiar with his thinking.
The Bank of Japan (BOJ) still expects inflation to slow next year, but perhaps not as much as previously thought, they said.
The implication is that the country’s ultra-loose monetary policy, keeping both short-term and long-term interest rates close to zero, may not last as long as forecasters think, although the sources said that with a weak economy, the stimulus would not be withdrawn. soon.
Most of the 36 economists polled this month by think tank Japan Center for Economic Research expected monetary policy to remain unchanged until the end of next year.
But one of the sources, describing internal BOJ debates, said: “Companies are passing on rising costs to households at a faster rate than expected. Inflation might not slow down much next year if consumption holds up.
Consumer inflation expectations are also rising, and price increases in this deflation-prone country have clearly spread to items not directly affected by rising fuel prices.
Until June, BOJ officials, giving speeches and discussing policy internally, frequently described underlying increases in inflation as “temporary.” But they stopped doing so in July, according to transcripts and minutes of political meetings.
While the speeches were public, few, if any, noticed the change.
“That probably wasn’t the best language to describe what was happening in the global and domestic inflation landscape,” a second source said of the word “temporary.”
Other central banks, including the US Federal Reserve, European Central Bank and Bank of England, also said last year that the rise in inflation would only be temporary. Caught off guard, they have now raised interest rates much more than they had expected. PRICE PRESSURE
Among the latest evidence in Japan of rising price pressures, annual core consumer inflation, which excludes fresh food but includes fuel costs, hit a seven-and-a-half-year high of 2.4% in July, beating the BOJ’s 2% target for a fourth consecutive month.
The BOJ currently expects the rate to fall below 2% next year.
Nearly 80% of listed Japanese food companies have raised prices this year or plan to do so, four times the ratio last year, according to a survey by private research firm Teikoku Databank.
These increases affect more than 20,000 food products, which will increase by an average of 14%. A third of the increase is expected to take effect in October, a sign that inflationary pressures could intensify later this year.
Most BOJ policymakers now expect core consumer inflation to hit 3% in October, with some predicting the upward pressure will continue into next year, the report said. the sources.
A consumer price index that excludes both fresh food and fuel costs closely watched by the BOJ as a key barometer of domestic demand was 1.2% higher in July than a year earlier , marking the fourth consecutive month of annual gains.
Some BOJ officials saw a chance that inflation, as measured by this index, will hit 2% in the coming months, the sources said.
They predicted that the stronger price outlook would lead to an upward revision to the BOJ’s inflation forecast when the board next revises its quarterly projections in October.
The key would be whether wages would begin to rise in response to the rising cost of living. Only when wages rise faster will Japan see a sustained increase in demand-driven inflation, which the BOJ is looking to achieve.
The role of the weaker yen, which is down almost 20% so far this year, is becoming a priority for the BOJ.
“Currency fluctuations are among the key factors affecting the economy and prices. For the BOJ, the impact on prices deserves special attention,” said a third source, noting that growing inflationary pressure from the weak yen would be a key topic in the bank’s public communications in the coming months.
There are warning signs that Japan is finally shedding its lingering deflationary mindset. In August, more than 90% of households expected prices to rise over the next 12 months, according to a government survey, with nearly 60% predicting a rise of 5% or more.
But Japan’s growth outlook is also uncertain, with the US, European and Chinese economies facing headwinds.
“Cost pressure is intensifying to a degree never seen before, pushing companies to raise prices. Some profitable companies are also raising wages,” said Goushi Kataoka, a former BOJ board member.
“The problem is that the global economy could enter a slump before this positive cycle gains momentum.”