(April 24): Japan’s key inflation gauge accelerated for the first time in five months, suggesting price pressures were building even before the full impact of elevated oil prices ripples through the economy.
Japan’s core consumer prices excluding fresh food rose 1.8% from a year earlier in March, the Ministry of Internal Affairs and Communications said Friday. That topped the median economist estimate of 1.7% and compared with a 1.6% advance in the prior month. A slowing in the decline of gasoline prices supported the index.
The measure excluding both fresh food and energy — closely watched by the Bank of Japan (BOJ) as a gauge of underlying inflation — increased 2.4%, remaining above the central bank’s 2% target. Overall inflation including all items accelerated to 1.5%.
The data come amid elevated oil costs and persistent yen weakness that’s driving up import prices. The BOJ is leaning towards keeping its benchmark rate unchanged Tuesday due to uncertainty related to the Middle East conflict, people familiar with the matter told Bloomberg this week. Still, pricing in the overnight swaps markets shows that as of Friday, traders saw a 67% chance of a hike in June.
Friday’s report may not have fully reflected the spike in energy prices. Gasoline prices climbed to a record ¥190.8 per liter in the middle of last month before the government revived subsidies to keep the price around ¥170, a costly fiscal step for Prime Minister Sanae Takaichi’s government. In Friday’s report, gasoline prices fell 5.4% from a year earlier, slowing from a 14.9% retreat in the previous month.
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Gasoline and kerosene were the driving factors, according to Yoshiki Shinke, senior executive economist at Daiichi Life Research Institute. “But their contribution is likely to ease from the next set of data as Takaichi’s subsidies started to cool gasoline prices from late last month.”
Crude oil prices are trading roughly 50% above levels seen before the US-Israeli war on Iran. That’s a headache for Japan, which imports almost all of its oil, more than 90% of which usually comes through the Strait of Hormuz.
A separate gauge of service producer prices released by the BOJ Friday reflected some of the impact from Middle East turbulence, rising 3.1% as costs for overseas cargo shipping surged 42% from a year earlier. Compared with the previous month, service producer prices rose 1.25%, the most in about 36 years excluding periods when there was a hike in the sales tax.
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Economists warn that it’ll become more difficult to keep a lid on inflation if crude prices remain elevated around these levels or increase further. The BOJ is considering raising its inflation outlook sharply in its quarterly outlook to be released with the policy statement next week, according to people familiar with the matter.
BOJ governor Kazuo Ueda has emphasised the need to assess both upside and downside risks to underlying inflation. About three quarters of 51 economists see risks skewed to the upside in a Bloomberg survey.
Two months into the war, a raft of Japan’s major food makers from Kikkoman Corp to Nisshin Oillio Group have announced plans to raise prices. That suggests price pressures may broaden, even as the oil crisis also weighs on demand.
In March, prices of processed food rose 5.2%, slowing from 5.7% in the previous month, weighing on the overall index. Rice prices, which surged a year ago, rose 6.8%.
Among other components, household durables prices increased 4.3%, reversing from a decline in February, and costs for lodging slowed to a 5% pace. Gains in service prices — a key indicator of underlying demand-driven inflation — were steady at 1.4%.
“Risks are on the upside for inflation with elevated oil prices and a weak yen,” Shinke said. “We are starting to see businesses are raising producer prices and we have to see how they will pass their rising costs on to consumers.”
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