Japan’s Consumer Inflation Picks Up, But Rate Hike Timing Still Unclear
Japan's battle with persistent deflation may finally be turning a corner, but the path to monetary policy normalization remains anything but straightforward. Consumer inflation, specifically the core consumer price index (CPI)—which strips out volatile fresh food prices—rose 2.9% last month from a year earlier. This marked a noticeable acceleration from August’s 2.7% increase, providing further evidence that price pressures are building across the economy.
This latest uptick solidifies a trend that has seen Japan's inflation comfortably above the Bank of Japan's (BOJ) Bank of Japan 2% target for over a year. For businesses and households, it means a continued squeeze on purchasing power, even as corporations grapple with higher input costs. Yet, despite the clear inflationary momentum, the timing for the BOJ to finally pivot away from its ultra-loose monetary policy remains shrouded in uncertainty.
The central bank finds itself in a delicate balancing act. On one hand, sustained inflation above target typically signals the need for tighter policy to prevent overheating. On the other, Governor Kazuo Ueda and his board have repeatedly emphasized that they need to see evidence of sustainable, demand-driven inflation, underpinned by robust wage growth, before considering a shift. They're wary of tightening too soon, risking a relapse into the deflationary spiral that plagued Japan for decades.
"It's not just about headline numbers," explains one Tokyo-based economist familiar with the BOJ's thinking. "The Bank wants to be convinced that inflation isn't just a temporary phenomenon driven by imported cost-push factors, like energy and commodity prices, or the weaker yen. They need to see a virtuous cycle where higher corporate profits lead to higher wages, which in turn fuels domestic demand and, subsequently, prices."
Indeed, the current inflation largely reflects these cost-push factors and the lingering effects of a depreciating yen, which makes imports more expensive. While the annual Shunto wage negotiations earlier this year yielded the strongest pay rises in decades, the BOJ is keen to observe if this momentum carries into next year and becomes a consistent trend. Without strong and broad-based wage growth, consumers' real incomes continue to fall, potentially dampening future spending.
What's more, global economic headwinds continue to cast a shadow. A slowdown in major trading partners, particularly China, poses risks to Japan's export-driven economy. Prematurely abandoning policies like yield curve control (YCC), which caps long-term bond yields, or raising interest rates could stifle a nascent recovery in domestic demand and exacerbate these external pressures. Many analysts believe the BOJ will likely wait until at least early next year, perhaps even April 2024, to gain more clarity on the wage outlook and the global economic trajectory.
For now, the BOJ appears content to maintain its accommodative stance, patiently waiting for the structural changes required to achieve its sustainable inflation target. While the latest 2.9% core CPI figure is a significant data point, it seems it's not quite the definitive signal the central bank needs to finally pull the trigger on monetary policy normalization. Businesses and investors alike will be watching closely for any subtle shifts in the BOJ's rhetoric as the wait for clarity continues.
