Japan Inflation Hovers at Two-Year Low as BOJ Easing Talk Grows

(Bloomberg) --

Japan’s key consumer prices continued to rise at the same pace in July, amid increasing speculation that the Bank of Japan may ramp up its stimulus as early as next month.

Prices excluding fresh food rose 0.6% in July from a year earlier, matching economists’ median estimate, according to data from the internal affairs ministry Friday. The downward impact of sharper falls in gasoline costs was canceled out by firmer mobile phone handset prices.

Key Insights

• A stubbornly low inflation rate makes it harder for the BOJ to argue it’s slowly but steadily making progress toward its 2% inflation target.
• Price growth is expected to slow further in coming months as a result of lower oil prices and government measures to make pre-school education free.
• Some BOJ watchers see a growing chance of Japan’s central bank ramping up its stimulus measures as early as September given a gloomier economic outlook that is likely to prompt Federal Reserve and European Central Bank action, moves that could strengthen the yen.
• “At this moment, a major concern for the central bank in Japan is the exchange rate. If the BOJ admits they are no longer able to achieve the 2% inflation target, that might trigger the yen’s appreciation,” Sayuri Shirai, a visiting researcher at the ADB Institute and a former BOJ board member, told Bloomberg TV.
• Still, Prime Minister Shinzo Abe’s government appears relatively comfortable with recent tepid price growth, given its concerns that a sales tax increase in October will squeeze household budgets over the following months.

What Bloomberg’s Economists Say

“Looking forward, inflation is likely to ease toward 4Q, excluding effects of a sales-tax hike in October. We expect core inflation -- the BOJ’s main target -- to remain around 0.5% (ex tax effects) in 4Q.”

--Yuki Masujima, senior economist
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• Overall, Japan’s consumer prices rose 0.5% in July, weaker than economists’ median forecast of 0.6% and the June reading of 0.7%.
• Stripping out energy and fresh food, consumer prices climbed 0.6%, better than a 0.5% estimate.
• Gasoline prices fell 4.3%, pulling down the overall price index by 0.1 percentage point. While mobile phone fees also continued to weigh on inflation, handset prices didn’t drag heavily as in previous months.

--With assistance from Tomoko Sato and Yoshiaki Nohara.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Henry Hoenig, Paul Jackson

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