Japan’s inflation speeds up, supporting BOJ shift expectations

Japan’s key inflation gauge further accelerated to the fastest pace since 1981, an outcome that will continue to fuel speculation the Bank of Japan will surprise markets again with policy change down the line. 

Consumer prices excluding fresh food climbed 3.7% in November from a year ago, the internal affairs ministry reported Friday. The result for the core index targeted by the BOJ matched an estimate by economists. The gain in overall inflation was a touch weaker than expected.  

Higher processed food prices were the biggest driver behind the acceleration as they further outstripped the impact of higher energy costs from a year earlier. A wide range of government measures including travel subsidies helped keep price growth below 4%. 

Japan’s bond markets showed little immediate response to the data, with benchmark 10-year notes yet to trade while five-year securities advanced to drive the yield down one basis point to 0.205% as of 10:05 a.m. in Tokyo. Swap rates for 10-year contracts rose four basis points to 0.84%, still shy of the nine-year peak of 0.9% reached on Tuesday.

Still, following this week’s shock decision by BOJ Governor Haruhiko Kuroda’s policy board to allow bond yields to move higher, the faster pace of inflation will keep speculation smoldering that the central bank is getting nearer to a policy pivot.

Core inflation has exceeded the BOJ’s 2% price target for eight straight months. Inflation excluding fresh food and energy has now reached 2.8%, pointing to strength in the underlying trend.

“A policy change may happen in the spring after the new governor takes the helm and wage negotiation results,” said Koya Miyamae, senior economist at SMBC Nikko Securities. Miyamae said the market doesn’t rule out change coming earlier, flagging that Kuroda has a record of suddenly changing his stance by 180 degrees.

“Kuroda can say something completely different from what he had been saying until just before the meeting, so the market tends to be skeptical,” he said.

Kuroda jolted markets around the world Tuesday by announcing the central bank will widen the 10-year bond yield target to around 0.5% either side of 0%, double the previous limit of 0.25%. The governor said this wasn’t a tightening move, but it also led to speculation it’s a step toward exiting from a decade of massive monetary easing.

Kuroda reiterated after the decision that he sees prices slowing next year, and more wage growth is needed for sustainable price gains.

Policy tightening could come as soon as next month, according to Eisuke Sakakibara, a former currency chief known as “Mr. Yen” for his influence on the currency in the late 1990s.

Goldman Sachs said the central bank could remove its negative interest rate policy next. Takatoshi Ito, a contender to succeed Kuroda also said this week’s moves could be the first step toward an exit.

In November, 882 food items including dairy products saw price increases, according to a Teikoku Databank survey. The report also forecasts that the price tag of more than 4,400 food products will be raised next year, with an expected peak in February.

Still, Prime Minister Fumio Kishida’s economic stimulus package will ramp up the downward pressure of government measures on prices in the new year. The relief measures worth 39 trillion yen ($295 billion) in fiscal spending include subsidies aimed at lowering household electricity bills by around 20%.

While economists expect those subsidies to start having a strong impact on inflation as early as January, the data for next month won’t be available until after the BOJ’s January meeting. The yen’s strengthening since its peak in October will also likely start to affect import prices.

The BOJ still sees inflation slowing below 2% next fiscal year, a view the government appeared to share in its latest economic forecast. The central bank will give its latest outlook for prices and growth in its next policy meeting to be held through Jan. 17 and 18.

The accelerating inflation may also impact the government’s stance on prices. Kishida is reportedly planning on revisiting a 10-year-old accord with the central bank. Local media said Kishida will consider adding flexibility to its inflation goal, though government officials denied the reports.

Meanwhile, real wages have been declining for seven straight months, a fact Kuroda has repeatedly raised as a matter of concern. Attention is also focused on the outcome of the upcoming annual spring wage negotiations due just a few weeks before Kuroda steps down in April.

Economists expect wages to rise to some extent, given the recent price hikes and Japanese firms’ relatively strong performance this year helped by the weaker yen.

“There’s a possibility the BOJ will take further action depending on how base salary negotiations go,” said SMBC Nikko’s Miyamae. – BLOOMBERG