(Bloomberg) — Inflation in Tokyo quickened in August, backing the case for the Bank of Japan to continue normalizing its policy with higher interest rates.
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Consumer prices excluding fresh food rose 2.4% in the capital, an acceleration from 2.2% growth in July, the Ministry of Internal Affairs reported Friday. The result exceeded the consensus estimate of 2.2%. Tokyo’s figures are leading indicators of the national data due in September.
After the BOJ’s July 31 interest rate hike, Governor Kazuo Ueda indicated his intention to raise the benchmark rate again if price trends develop in line with the bank’s projections. At the same time, he signaled last week that he won’t rush ahead with any further policy steps as the BOJ carefully gauges the impact of unstable financial markets on the inflation outlook for the time being.
The BOJ is widely expected to hold its settings steady when the board next decides policy on Sept. 20. Most economists surveyed earlier this month predicted another rate hike some time between October and January. A former BOJ board member said the BOJ won’t raise the policy rate again this year in the wake of the recent market turmoil.
What Bloomberg Economics Says…
“The surprisingly sharp run-up in Tokyo’s August inflation will surely catch the Bank of Japan’s eye and, we think, puts a rate hike on the table for the October meeting. The report provides clear evidence that solid pay rises are feeding into consumer prices.”
— Taro Kimura, economist
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The overall inflation gauge got a boost from rising energy prices, with the effect exaggerated somewhat by low readings a year ago. Electricity prices rose 24.2%, accelerating from 19.7% in July. Household durable goods price gains also picked up a bit, while the rise in costs for hotels slowed.
A gauge that excludes energy and fresh food rose 1.6%, accelerating a tad from July.
The gauge for service prices, which shows how inflation is spreading beyond goods and materials, rose 0.7% in August, compared with a 0.5% gain in July.
Separate data showed that the jobless rate edged higher to 2.7%, while the jobs-to-applicants ratio nudged higher to 1.24, meaning there were 124 jobs available to every 100 applicants. Japan’s factory output flipped back to growth, rising 2.8% in July from June, while missing the consensus call for a 3.5% increase. Retail sales growth slowed to 2.6% year on year in July.
Policymakers are hopeful that higher wages on the back of tight labor market conditions will make households more resilient to inflation. Real wages rose for the first time in 27 months in June in a bright sign after consumer inflation hovered at or above the BOJ’s target for more than two years.
Simmering frustration over rising costs of living was a factor that weighed persistently on approval ratings for Prime Minister Fumio Kishida, who decided earlier this month to step down. A leadership vote in the ruling Liberal Democratic Party set for Sept. 27 will determine Kishida’s successor, who will have the option of calling a national election to secure a fresh mandate.
Kishida had sought to placate consumers by implementing a one-off tax rebate for many households in June and by re-starting the utility subsidies from August.
Price trends remain vulnerable to any swings in the yen, which hit the lowest level in decades versus the dollar in July. Japan’s currency has trimmed its losses since then. The yen’s weakness supports exporters and inflates their overseas earnings. At the same time, it increases the costs of imported goods and materials, hurting households as well as many small- to medium-sized companies that supply the exporters.
The government has yet to declare the economy has definitively exited deflation even after more than two years of rising prices. Candidates vying to become the nation’s next premier may lay out various plans to give the economy one more boost. Among those who have declared they will run, Digital Minister Kono Taro has called for fiscal discipline as interest rates rise slowly. Another candidate, Takayuki Kobayashi, signaled the importance of spending for growth.
Official campaigning for the LDP race starts on Sept. 12, and about 10 candidates expected to run.
(Updates with industrial output, retail sales)
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