The government’s utility subsides aimed to reduce price pressures led to a slowdown in Japan’s core rate of inflation in September. This was the first decrease in five months.
The Ministry of Internal Affairs released data on Friday showing that consumer prices, excluding food, rose by 2.4% on an annual basis, down from the 2.8% recorded in August.
This result was slightly higher than the consensus of economists, which had been estimated at 2.3%.
Electricity and gas price declines have contributed significantly to the overall decrease in inflation, which was 2.5% last month compared to 3.0% previously.
Subsidies from the government have shaved off 0.55 percentage points of the inflation rate. This highlights the effect fiscal measures had on the recent decline.
Rates to remain unchanged by central bank
It is expected that the Bank of Japan will maintain its current interest rate of 0.25% at its next policy meeting, which takes place on October 31, according to most analysts.
The central bank indicated that despite the drop in inflation it may be willing to raise rates if the inflation rate continues to match its forecasts.
On the other hand, they are still cautious after criticisms of their rate increase in July, which caused a downturn on the market.
Yoshiki Shimke, senior economist of Dai-Ichi Life Research Institute suggested that subsidies may only have a temporary impact on inflation.
Shinke stated that “if the subsidies were extended, CPI would go down but the price trend wouldn’t be changed.”
He added that the BOJ decision will not be significantly affected by these events.
The core measure of inflation, which does not include fresh food or energy prices, increased slightly from 2.1% to 2,1% in August.
The BOJ considers service prices to be a key indicator. They increased by 1.3% on an annual basis, down from 1.4% last August. This indicates that price pressures persist despite the overall slowdown.
Forecasts of inflation linked to currency and subsidy movements
Inflation in Japan will be affected by the extension of utility subsidies. These are due to expire at the end of this month. Inflation could rise if utility subsidies are allowed to expire.
According to a report by Teikoku Databank, food companies increased prices on nearly 3,000 products in October. This is a further indication of inflationary pressures.
The currency fluctuations are also a major factor.
This week the yen fell to 150 versus the dollar, mainly due to strong US economic statistics that dampened expectations for Federal Reserve rate reductions.
Inflationary pressures are increased in Japan by a weaker yen.
Shigeru Shiba, the Prime Minister, is currently preparing an economic stimulus package that could include cash payments to low-income families in order to reduce price pressures, and boost public support before the October 27 general elections.
The size of the extra budget may exceed last year’s, which will have a further impact on inflation.
The wage growth is below inflation
Despite the fact that Japan’s wages have increased significantly this year due to labor shortages, successful union negotiation and the success of these negotiations, inflation has continued to exceed real wage growth.
Inflation-adjusted real wages fell slightly in August, after modest increases over the two previous months. This reflects ongoing difficulties for households to consume.
To support consumers and to drive an economic recovery, the government that took office in October has placed a priority on wage increases above inflation.
Experts warn that this will be crucial for the stabilization of the economy on the long-term.
As new information becomes available, this post Japan’s Inflation Cools Down for First Time in Five Months amid Subsidies may be updated.
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