Japan’s inflation outpaces US price rise for the first time in 8 years

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Headline inflation in Japan rose to 3.3 percent in June, overtaking the US figure for the first time in eight years and underscoring how Asia’s most advanced economy is no longer immune to global inflation.

Price pressures in Japan, which has been battling deflation for most of the past three decades, have proved more widespread and persistent than expected. That adds to the pressure on the Bank of Japan, which meets next week and faces calls from investors to end its extremely loose monetary policy.

Japan remains the only central bank in the world with negative interest rates, and any reversal of this strategy would have a cascading effect on global financial markets.

Annual inflation of the consumer price index and core CPI, which excludes fresh food, rose from 3.2 percent in May to 3.3 percent in June, according to data released on Friday. The increase was in line with market expectations, primarily due to higher utility bills.

This compares with 3 percent inflation in the US, where the Federal Reserve has raised its benchmark interest rate from zero to a range of 5 to 5.25 percent in early 2022. Friday’s data showed Japan’s headline inflation higher than the US for the first time since October 2015.

The BOJ has argued that the easing measures are needed to support the economy because the country’s inflation is not driven by strong underlying consumer demand and will slow as the cost of imported goods declines.

In a sign of that scenario, the so-called near-core CPI, which separates energy and food prices and is similar to core CPI measures used in other countries, fell to 4.2 percent from 4.3 percent in the June data.

But Yoshiki Shinke, chief economist at Dai-Ichi Life Research Institute, said there is uncertainty about the pace of the decline, companies are more willing to pass on higher costs to consumers and big businesses are raising wages.

“If this is normal cost-push inflation, prices are likely to drop dramatically as time goes on, but the price trend could last much longer than expected,” Shinke said. “With the level of 3 or 4 percent, inflation in Japan is clearly no longer low.”

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This week, BoJ governor Kazuo Ueda indicated the central bank would maintain its easing measures at its policy meeting next week. “There is still some way to go to achieve our 2 per cent inflation target on a sustainable basis,” he added.

The yen declined against the dollar over the comments as markets eased hopes that the central bank would adjust its yield curve controls, a policy it introduced in 2016 to cap rates on benchmark 10-year Japanese government bonds at near zero percent.

Still, UBS economist Masamichi Adachi said he expects the BOJ to widen the trading band on government bonds and raise its inflation outlook next week. He said underlying inflation has risen even though it has not reached the bank’s 2 per cent target on a sustained basis.

In December, the BOJ said it would allow 10-year bond yields to fluctuate 0.5 percentage points above or below a target of zero, from a previous band of 0.25 percentage points.

Get free Japanese economy updates

we will send you one myFT Daily Digest Latest Email Rounding Japanese economy News every morning.

Headline inflation in Japan rose to 3.3 percent in June, overtaking the US figure for the first time in eight years and underscoring how Asia’s most advanced economy is no longer immune to global inflation.

Price pressures in Japan, which has been battling deflation for most of the past three decades, have proved more widespread and persistent than expected. That adds to the pressure on the Bank of Japan, which meets next week and faces calls from investors to end its extremely loose monetary policy.

Japan remains the only central bank in the world with negative interest rates, and any reversal of this strategy would have a cascading effect on global financial markets.

Annual inflation of the consumer price index and core CPI, which excludes fresh food, rose from 3.2 percent in May to 3.3 percent in June, according to data released on Friday. The increase was in line with market expectations, primarily due to higher utility bills.

This compares with 3 percent inflation in the US, where the Federal Reserve has raised its benchmark interest rate from zero to a range of 5 to 5.25 percent in early 2022. Friday’s data showed Japan’s headline inflation higher than the US for the first time since October 2015.

The BOJ has argued that the easing measures are needed to support the economy because the country’s inflation is not driven by strong underlying consumer demand and will slow as the cost of imported goods declines.

In a sign of that scenario, the so-called near-core CPI, which separates energy and food prices and is similar to core CPI measures used in other countries, fell to 4.2 percent from 4.3 percent in the June data.

But Yoshiki Shinke, chief economist at Dai-Ichi Life Research Institute, said there is uncertainty about the pace of the decline, companies are more willing to pass on higher costs to consumers and big businesses are raising wages.

“If this is normal cost-push inflation, prices are likely to drop dramatically as time goes on, but the price trend could last much longer than expected,” Shinke said. “With the level of 3 or 4 percent, inflation in Japan is clearly no longer low.”

You are viewing a snapshot of an interactive graphic. This is probably due to being offline or JavaScript is disabled in your browser.

This week, BoJ governor Kazuo Ueda indicated the central bank would maintain its easing measures at its policy meeting next week. “There is still some way to go to achieve our 2 per cent inflation target on a sustainable basis,” he added.

The yen declined against the dollar over the comments as markets eased hopes that the central bank would adjust its yield curve controls, a policy it introduced in 2016 to cap rates on benchmark 10-year Japanese government bonds at near zero percent.

Still, UBS economist Masamichi Adachi said he expects the BOJ to widen the trading band on government bonds and raise its inflation outlook next week. He said underlying inflation has risen even though it has not reached the bank’s 2 per cent target on a sustained basis.

In December, the BOJ said it would allow 10-year bond yields to fluctuate 0.5 percentage points above or below a target of zero, from a previous band of 0.25 percentage points.