The government released data on Friday showing that Japan’s core rate of inflation increased by 3% during February. This was higher than the 2.9% economists had predicted.
The figure is lower than the 3.2% of January, but it was the 35th month in a row that the Bank of Japan (BOJ), which sets the 2% inflation target for Japan, exceeded the limit.
The headline inflation rate fell from the two-year-high of 4% in January to 3.7%.
The BOJ’s closely monitored “core-core inflation” measure, excluding fresh foods and energy, increased to 2.6% in March from 2.5% the month before.
Japan’s consumer price inflation was slightly higher than anticipated, even though government subsidies on energy tempered the increase.
The Bank of Japan should continue to increase rates gradually.
Analysts expect that the Bank of Japan will raise the policy rate in either June or July. The pace of the hikes is expected to be one every six months, until the cycle of tightening reaches its maximum.
BOJ’s Policy Outlook
Data was released following the BOJ decision to maintain interest rates at 0.5% on Wednesday, although policymakers indicated that inflationary pressures may persist.
BOJ Governor Kazuo Ueda has warned that the rising cost of food and wage increases could push inflation higher.
Central bank officials expect core inflation will rise throughout the fiscal year 2025, due to higher prices of rice and expiration government subsidies designed to contain inflation.
The central bank’s latest outlook for economic growth predicts that the core inflation rate will average 2,7% in the current fiscal year and 2.4% next year.
BOJ has also stressed that changes in exchange rates could have a further impact on prices due to the uncertainty caused by changing trade and economic policies among major economies.
The Nikkei fell slightly after the release of the inflation data.
After ending its lengthy stimulus program in January, the Bank of Japan raised short-term interest rates from 0.25% to 0.5%. It has now indicated that additional hikes are still possible.
Central bank officials continue to stress their goal of creating a “virtuous circle” that will see wages and prices rise.
The wage growth is a strong argument for policy reform
Inflation data coincides with wage increases secured by the BOJ through its annual wage negotiation, shunto. This further supports expectations that it will continue to adjust the monetary policy.
Rengo, Japan’s biggest labor union, announced March 14, that they had secured a wage hike of 5.46% on average from April, the largest increase for over 30 years. The increase was 0.18 points more than the 5.28% wage hike of last year.
The average increase in wages for small- and medium-sized firms was 5.09%. This is the highest wage rise since 1992.
Analysts expect that the BOJ will continue to hike rates if there are no unexpected shocks in the economy.
As new information becomes available, this post Japan’s Core Inflation Tops Forecasts and Fuels BOJ Rate Hike Hope may be updated.
