Japan Consumer Prices (Jul. 2022)
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Japan Consumer Prices (Jul. 2022)

Headline inflation was the highest since 1991 in July and we think it still has higher to climb. But this will not make the Bank of Japan budge on its ultra-easy monetary policy. Asia Drop-In (25th Aug.): What’s the economic impact of a weak yen? What does the latest China-Taiwan flare-up mean for decoupling? How ugly are conditions in China’s real estate sector? Join economists from across our Asia services for this regular briefing on the region’s big investment stories. Register now.

Inflation summit in sight, but BoJ will not budge

  • Headline inflation was the highest since 1991 in July and we think it still has higher to climb. But this will not make the Bank of Japan budge on its ultra-easy monetary policy.
  • Headline inflation climbed yet higher to 2.6% July from 2.4% in June, surpassing the earlier peak in May of 2.5%. Inflation excluding fresh food and energy, which rose to 1.2% from 1.0% in June, was the highest in more than six years. (See Chart 1.) Much of the thrust came from a 3.0% rise in “core” goods prices, which strips out fresh food and energy, contributing 1.2%-pts to the headline figure. Energy prices contributed another 1.1%-pts but that has come down from the recent peak of 1.5%-pts between March and May. Food prices excluding fresh food accelerated from 3.2% y/y to 3.7%, the largest rise since 2008.
  • Meanwhile, services inflation inched up from -0.3% in June to -0.2% in July as prices for eating out increased by 3.4%, from 2.8% in June. still held back by the deflationary impact of the cut in mobile phone tariffs in 2021. Mobile phone charges contracted 21.7% y/y, which knocked off almost 0.4%-pts from headline inflation, but these effects will fade by October. (See Chart 2.)
  • In sum, July’s inflation figures are consistent with our view that headline inflation will peak around 3.0% by year-end. We suspect that manufacturers have yet to fully pass on price increases to consumers and that should see “core” goods inflation peak around 4.0% over the coming months and serve as a key driver of headline inflation. Indeed, surveys of major food manufacturers by the Teikoku Databank indicate prices will rise further in August through October at least.
  • Despite the general rise in inflation, we do not think the Bank of Japan will tighten monetary policy in response. The Bank’s underlying measures of inflation, particularly mode inflation, which measures the most common instance of price increase in the inflation basket, is unlikely to have increased to a level that would warrant a rate hike.

Chart 1: Consumer Prices (excl. tax & childcare, % y/y)

Chart 2: CPI “Core” Goods & Services (excl. tax, % y/y)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics

Table : Consumer Prices (excl. tax & free childcare, % y/y)

Total

Fresh Food

Total Excl. Fresh Food

Energy

Total Excl. Fresh Food & Energy

Goods Excl. Fresh Food & Energy

Services

May 22

2.5

12.3

2.1

17.1

0.8

2.2

-0.3

Jun 22

2.4

6.5

2.2

16.5

1.0

2.6

-0.3

Jul 22

2.6

8.3

2.4

16.0

1.2

3.0

-0.2

Source: Bureau of Statistics

Darren Tay Japan Economist
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