by Leika Kihara
TOKYO (Reuters) – Something from the Bank of Japan’s rhetoric about rising inflation has disappeared: the word “temporary.”
No longer suggesting that strong price hikes will not last long, the central bank may soon go further by saying they will be faster than expected for the rest of this year, driven in part by the yen’s drop to 24-year lows. Sources familiar with her thinking.
They said the Bank of Japan still expects inflation to slow next year, but perhaps not as much as it had previously thought.
The implication is that the country’s ultra-easy monetary policy, which keeps short and long-term interest rates near zero, may not last as long as forecasters believe, although sources said that with the economy weakening, stimulus will not be. Withdrew soon.
Most of the 36 economists surveyed by the Japan Center for Economic Research this month expected monetary policy to remain unchanged until the end of next year.
But one of the sources, describing the BOJ’s internal discussions, said: “Companies are passing on increased costs to households faster than expected. Inflation may not slow down much next year if consumption continues.”
Consumer inflation expectations are also rising, and price hikes in the deflation-prone country have clearly spread to components not directly affected by rising fuel costs.
Until June, Bank of Japan officials, while giving speeches and discussing domestic policy, frequently described underlying spikes in inflation as “temporary.” But they stopped that in July, according to transcripts and minutes of policy meetings.
While the sermons were public, few, if any, people noticed this modification.
A second source said the word “temporary” was probably not the best language to describe what was happening in the global and domestic inflation scene.
Other central banks, notably the US Federal Reserve, the European Central Bank and the Bank of England, have similarly said last year that rising inflation would only be temporary. They are now more surprised by the interest rate hike than they expected.
Among the latest evidence in Japan of rising price pressures, annual core consumer inflation, which excludes fresh food but includes fuel costs, reached a seven-and-a-half-year high of 2.4% in July, topping the Bank of Japan’s 2% target for the fourth month on straight.
The Bank of Japan currently expects the rate to fall below 2% next year.
Nearly 80% of Japan’s listed food companies have raised prices this year or plan to do so, four times the rate last year, according to a survey by private research firm Teikoku Databank.
These increases affect more than 20,000 nutrients, which will increase by an average of 14%. A third of the increase is set to take effect in October, a sign that inflationary pressure may intensify later this year.
The sources said most BoJ policymakers now expect core consumer inflation to reach 3% in October, with some expecting the upward pressure to continue into next year.
The CPI, which excludes both fresh food and fuel costs – which the Bank of Japan closely monitors as a key gauge of domestic demand – was 1.2% higher in July from a year earlier, marking the fourth consecutive month of annual gains.
The sources said that some BOJ officials see the possibility of inflation as measured by that indicator reaching 2% in the coming months.
They expected the stronger price expectations to lead to an upward revision of the Bank of Japan’s inflation expectations when the Board of Directors revised its quarterly forecasts in October.
The key will be whether wages start to rise in response to the rising cost of living. Only when wages rise faster will Japan experience the sustained demand-driven increase in inflation that the Bank of Japan is seeking.
The role of the weak yen, which is down nearly 20% so far this year, has become the focus of the Bank of Japan.
“Currency movements are among the main factors affecting the economy and prices. For the BOJ, the impact on prices warrants special attention,” a third source said, noting that the mounting inflationary pressure from a weak yen would be a major topic in the bank’s public. contacts in the coming months.
There are early signs that Japan is finally losing its deflationary mindset. A government survey showed that in August, more than 90% of households expected a price increase in the next 12 months, with 60% expecting a rise of 5% or more.
But there is also uncertainty about the growth outlook in Japan as the US, European and Chinese economies face headwinds.
“Cost push pressure is mounting to an unprecedented degree, prompting companies to raise prices. Some profitable companies raise wages as well,” said former BOJ board member Goshi Kataoka.
“The problem is that the global economy may enter a recession before this positive cycle gains momentum.”