Japan’s Inflation Skyrockets: BOJ Feels the Heat

Data released on Friday revealed that Japan’s core consumer inflation reached a fresh 41-year high in January due to the increased costs being passed onto households. This puts additional pressure on the central bank to end its extensive stimulus program.

The increase in prices of fuel and daily necessities has put policymakers in a challenging position since many households have not seen a significant increase in wages to offset the rising cost of living. The core consumer price index (CPI), which excludes volatile fresh food but includes energy costs, accelerated to 4.2% higher in January from a 4.0% annual gain in December, matching a median market forecast.

This was the highest increase since September 1981, when Japan’s import-reliant economy was hit by an oil crisis in the Middle East. According to the data, core consumer inflation has surpassed the Bank of Japan’s 2% target for nine consecutive months, primarily due to the continuous increase in raw material costs and fuel prices.

Yoshimasa Maruyama, Chief Economist at SMBC Nikko Securities, stated that while inflation will likely peak in January, it may not drop below the BOJ’s 2% target for some time. However, he also questioned the sustainability of the inflation rise since it is still primarily driven by food and fuel costs.

As he prepares to take office, Governor Kazuo Ueda faces the challenge of maintaining the BOJ’s yield control policy amidst market concerns about a potential rise in interest rates due to strong inflation. In response, Ueda has emphasized the need to maintain ultra-low rates, noting that the recent increase in inflation is largely due to rising import costs and not a result of strong demand.

However, Ueda acknowledges that it will take time for inflation to reach the BOJ’s 2% target sustainably and stably. Ueda’s first policy meeting on April 28 will include the BOJ’s inflation forecasts through fiscal 2025. While Japan’s economy avoided recession in Q4 2020, the recovery has been slow due to slumping business investment and ongoing uncertainty in the global economic outlook.

Source: Reuters