JAPAN’S inflation hit its fastest clip in 40 years in October, an outcome that puts the central bank in an even more awkward position as it tries to explain the need to stick with monetary stimulus to pursue stable price growth.

Consumer prices excluding fresh food climbed 3.6% in October from a year ago, with the acceleration driven by processed food and the fading impact of mobile phone fee cuts, the internal affairs ministry reported on Friday.

The reading outpaced a 3.5% forecast by analysts and marks the fastest price growth since 1982. Price increases have now exceeded the Bank of Japan’s (BoJ) 2% price target for seven straight months, though the result is unlikely to convince governor Haruhiko Kuroda to change course.

“It’s getting harder for the BoJ to keep saying that the current cost-push inflation is temporary,” said Mari Iwashita, chief market economist at Daiwa Securities Co. “If the yen remains weak, more companies will try to pass on costs to consumers.”

Kuroda’s consistently maintained that the current cost-push inflation is only temporary, and that the central bank’s ultra-loose policy is necessary to keep supporting Japan’s recovery from the pandemic. Kuroda continued to reiterate that view on Friday, speaking after the release in Parliament.

The BoJ currently expects price growth to weaken below 2% next fiscal year starting in April.

	Core inflation	Core inflation ex-energy
FY2022	2.9%	1.8%
FY2023	1.6%	1.6%
FY2024	1.6%	1.6%

While processed food and energy remain the largest factors behind inflation, the former’s impact has now overtaken the latter, suggesting that price gains have now gone far beyond just a boost from commodities. Excluding fresh food and energy, inflation has jumped to 2.5%.

Inflation is now stronger than it was after a sales tax hike in 2014. That tax hike battered consumer spending, sending the economy into its biggest economic contraction since the global financial crisis at that point. The longer prices continue to rise, the more chance that inflation will take root in the country.

The faster pace of inflation is at least partially due to the sharp drop in the yen. The wider trade deficit in October also reflected the negative hit from the weaker currency, while the embattled yen and a ballooning import bill also helped push Japan’s overall economy back into reverse in the third quarter.

The yen neared 152 per dollar at one point in October, hitting a fresh 32-year low. Japan’s government stepped into markets again during the month to prop up the currency.

Rising prices have cooled Japanese households’ appetite for spending beyond their daily necessities. In October, about 6,700 food items, ranging from mayonnaise to beverages, saw price hikes, according to a Teikoku Databank survey.

Although the trend appears to have peaked last month, another 833 food items, including dairy products, are expected to go up in price in November.

Meanwhile, real wages have been declining for six months since April, adding to factors eating into consumers’ purchasing power.

To ease the hit of higher prices on consumption, Prime Minister Fumio Kishida last month ordered an economic stimulus package that includes aid to reduce energy costs and cash handouts for childcare. His cabinet has approved an extra budget of ¥29.1 trillion (RM947.98 billion)to partly fund these measures.

“I expect inflation to hold above 3% this year, but starting in January it will fall below 3% again thanks to the government’s price relief measures,” said Daiwa’s Iwashita. “Still, that doesn’t mean price momentum is losing force.”

SMBC Nikko Securities economists expect the key inflation gauge will sharply slow to around 2.5% early next year due to the government measures. But with the end of the support set to come in stages, price growth will probably start to accelerate again to around 3% in 2024, economists led by Koya Miyamae wrote in a report. – BLOOMBERG