Japan inflation may have peaked, no imminent change in BOJ policy seen

TOKYO – Japan’s core inflation held above the central bank’s 2 percent target in June for the 15th straight month, but an index stripping out energy costs slowed, data showed, suggesting prolonged commodity-driven price pressures may have peaked.

However, with service price growth also slowing last month, policymakers will feel that wage pressures have yet to build up enough to warrant imminent ultra-loose monetary tightening.

While the data raises the possibility that the Bank of Japan (BOJ) will improve this year’s inflation forecast next week, it may take pressure off the central bank to soon start phasing out its massive monetary stimulus, analysts say.

“Cost-driven inflation is finally starting to peak. We are likely to see slow inflation in the coming months, which would allow the BOJ to keep policy stable for now,” said Toru Suehiro, chief economist at Daiwa Securities.

“Although prices for services may increase next year, prices for goods will remain weak. Inflation could be around 1 percent next year.”

The core nationwide consumer price index (CPI), which excludes fresh food costs, rose 3.3 percent in June from a year earlier, matching a median market forecast and accelerating from a 3.2 percent rise in May, data showed on Friday.

READ: Japan inflation picks up again in June, remains above BOJ target

An increase in utility bills was coupled with a steady rise in food prices and daily necessities, increasing the burden on households.

But an index excluding fresh food and fuel costs, which is closely watched by the BOJ as a better gauge of trend inflation, rose 4.2 percent in June from a year earlier, slower than a 4.3 percent rise in May.

It was the first slowdown since January 2022 in a sign that the rapid pace of growth seen in recent months, fueled by a series of price hikes by companies, was moderating.

Services prices, closely watched by policymakers as to whether inflation is being driven more by higher labor costs, rose 1.6 percent in June from a year earlier after a 1.7 percent gain in May.

The data comes ahead of the closely watched BOJ policy meeting on July 27-28, when the board will publish new quarterly projections and discuss how much progress Japan is making towards sustainably achieving its 2 percent inflation target.

READ: Japan govt cuts growth forecast, sees inflation exceeding BOJ target

Core inflation in Japan’s capital, due to be released hours before the BOJ’s July 28 policy announcement, likely slowed sharply in July as well, according to a Reuters survey.

With inflation outpacing the BOJ’s target for over a year, markets are simmering with speculation that the BOJ may soon phase out its controversial yield curve control (YCC) policy as early as next week.

BOJ Governor Kazuo Ueda has stressed the need to maintain very loose policy until recent cost-driven inflation shifts to one driven by robust domestic demand and higher wage growth.

READ: BOJ keeps rates ultra-low, focus shifts to Ueda’s inflation views

The key would be whether companies continue to offer higher wages next year, similar to this year, and begin to translate rising labor costs into service prices.

“If more companies raise wages and pass on the cost, the prices of services could skyrocket,” said Yoshiki Shinke, chief economist at the Dai-ichi Life Research Institute.

“Inflation excluding food and energy is likely to moderate in the future, but the pace of slowdown could be gradual.”

Under YCC, the BOJ targets short-term interest rates at -0.1 percent and buys large amounts of government bonds to cap 10-year bond yields around 0 percent as part of efforts to push inflation to its 2 percent target.

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