Japan Inflation Ticks Up, Dashes BoJ Estimates

Japan’s annual core consumer inflation ticked up slightly in August but remained distant from the central bank’s 2% target, suggesting that monetary policy will stay ultra-loose for the time being.

The proportion of items in the inflation gauge that rose in price last month hit its lowest in nearly five years, underscoring the challenge the Bank of Japan faces in wiping out the country’s entrenched deflationary mindset, Reuters reported.

Soft inflation could pose a challenge for Prime Minister Shinzo Abe’s efforts to put a sustained end to deflation as he heads into a third term, though he has recently distanced himself from the central bank’s elusive target.

“Inflation will hover around current levels until early next year but probably won’t accelerate well above 1%, dashing the BoJ’s hopes,” said Daiwa Securities Chief Market Economist Mari Iwashita.

“Abe’s recent remarks suggest the government is no longer insisting that the BoJ’s price target be met.”

The nationwide core consumer price index, which excludes fresh food costs, rose 0.9% in August from a year earlier, matching a median market forecast and accelerating slightly from a 0.8% gain in July.

The so-called core-core index, a more closely watched gauge the BoJ uses to strip away the effect of both energy and fresh food costs, was up 0.4% in August after rising 0.3% in July, government data showed on Friday.

Stubbornly soft inflation has dashed the BoJ’s hopes that solid economic growth will translate into higher prices, and could delay the central bank’s exit from ultra-easy policy.

Of the items composing core CPI, 49.3% saw prices rise in August from a year earlier, slipping to the lowest level since November 2013, the data showed.

Prices of goods ranging from processed food to medicines were starting to fall again, a government official briefing reporters on the data said, suggesting that weak consumption was sapping firms’ pricing power.

A spike in the prices of vegetables and other fresh foods, blamed on heavy rain in June and July, may prevent households from boosting discretionary spending, some analysts say.

Overall consumer prices, which include fresh food costs, jumped 1.3% in August from a year earlier, accelerating from 0.9% in July.