Japan’s Energy-Driven Inflation Hits Fastest Pace in 2 Years 

(Bloomberg) -- Japan’s key consumer prices advanced in March at the fastest pace in more than two years, complicating the central bank’s communication of its easy policy stance given a further acceleration is expected in April.

Prices excluding fresh food climbed 0.8% from a year earlier, according to the ministry of internal affairs Friday, matching economists’ estimates. Energy prices underpinned the gains, surging 20.8%, the most in 41 years.

The result still leaves Japan’s inflation far behind the soaring levels in other major economies, enabling the Bank of Japan to argue it must stick with rock-bottom interest rates even as other central banks race to hike borrowing costs.

Still, each acceleration is complicating the BOJ’s messaging task. A sharp jump in inflation closer to 2% that is expected in April is likely to raise further questions over why Governor Haruhiko Kuroda is sticking with stimulus at the cost of weakening the yen and fueling its harmful impact.

“The results show this is cost-push inflation and support the BOJ’s argument,” said Taro Saito, head of economic research at NLI Research Institute. “There is no change in the underlying trend, unlike the U.S., pointing to little need of BOJ action for inflation. The question is whether they will adjust policy to slow weakening of the yen.”

Inflation will be a key part of discussions at the BOJ’s policy meeting next week with an increasing number of analysts seeing a chance of policy action this year. Price readings are expected to jump sharply in April as the heavy drag of cell phone fee cuts a year ago start to drop out of calculations.   

Kuroda has rejected the idea of heading toward a normalization of policy like the Federal Reserve as he insists that higher inflation pushed up by costs puts the economy at risk of a slowdown. Kuroda’s dovish stance has helped weaken the yen to a fresh 20-year low this week as investors look for higher yields outside Japan. 

Currency Headache

The yen has become a growing headache for Japanese officials as it is amplifying the higher costs households and business are already facing. Further gains in commodity prices and energy stemming partly from Russia’s war on Ukraine are expected to hit a fragile economy that is heavily reliant on importing natural resources.

Energy boosted overall prices by about 1.5 percentage points, according to the March data. The cost of processed food lifted prices by 0.44 point as inflation shows further signs of rippling through the economy.

Prime Minister Fumio Kishida is expected to unveil measures in the coming days to cushion the impact of higher energy prices and costlier daily necessities. The premier wants to maintain robust public approval ahead of a key national election this summer that could help him shore up his administration for the longer term.

Meiji Holdings, a manufacturer of a wide range of food products from ice cream to cheese, announced price hikes of as much as 8.6% in a statement earlier this month. That’s just one example of a gradual shift among companies to embrace price change rather than trying to absorb higher costs without sharing the pain with consumers.

Still, a lack of strong wage growth is helping keep the BOJ determined to stick with stimulus. Private economists forecast inflation will decelerate to less than 1% again in the year starting next April after averaging 1.8% this fiscal year.

©2022 Bloomberg L.P.