Tokyo inflation is at its fastest pace since 1982, driven by a weaker yen

(Bloomberg) — Tokyo’s inflation rate beat expectations for its fastest rate since 1982, an acceleration that suggests nationwide price growth will also accelerate in November after months of a weak yen and higher energy costs.

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Consumer prices excluding fresh food rose 3.6% in the capital in November, with the faster pace driven by more price gains for processed food, according to the Home Affairs Ministry on Friday. The reading was the highest since April 1982 and stronger than analysts’ expectations of 3.5%.

The continued acceleration in core inflation challenges BoJ Governor Haruhiko Kuroda’s view that current cost-push inflation is only temporary and that continued stimulus is required to ensure price growth is sustainable.

With gains in energy costs likely to ease as massive government subsidies take effect in the coming months, economists largely agree with Kuroda that inflation in Japan will decline, although opinions differ on the extent.

This means that the Bank of Japan is likely to stick to ultra-low interest rates for the remainder of Kuroda’s term. Market speculation is very focused on what will happen after the governor leaves in April.

“Given what the Bank of Japan has said and its current inflation expectations, I don’t think monetary policy will change in fiscal 2022,” said SMBC Nikko Securities chief economist Yoshimasa Maruyama. “But if the new ruler comes under pressure from the government because of the weak yen, the Bank of Japan can still move in policy” in fiscal 2023.

Tokyo figures showed that prices of processed food rose 6.7% in November, contributing about 1.4 percentage points to headline inflation and outpacing the energy impact. A lot of those food items including raw materials are imported and thus are directly affected by a weaker yen.

About 833 food items including dairy products saw price increases in November, according to the Teikoku databank survey. The report also predicted that Japan would experience another wave of price increases in February or March next year, with costs expected to rise for another 2,000 items.

Real wages have fallen since April, adding to the factors affecting consumers’ purchasing power and contributing to the Bank of Japan’s concerns that an early increase in interest rates could turn the economy around.

To cushion the impact of rising prices on consumption, Prime Minister Fumio Kishida put together an economic stimulus package last month, funded in part by a 29.1 trillion yen ($210 billion) extra budget.

What Bloomberg tells the economy…

“Looking ahead, we see core inflation hovering around 3.4% in the fourth quarter and then decelerating rapidly in the first quarter of 23. A weaker yen should continue to support prices for processed food and other imports. But subsidies to support discounts on electricity and gas bills starting in January January 2 can reduce core CPI inflation by as much as 0.8 percentage points in the first quarter.”

– Yuki Masujima, economist

To view the full report, click here

Despite the continued acceleration of inflation and the historical decline of the yen, the government has not put pressure on the Bank of Japan to adjust policy so far. Instead, when the Japanese currency approached 152 to the dollar in October, the government spent 6.3 trillion yen to intervene in the market.

Since then, as expectations of a slower Fed rate hike have risen, the yen has strengthened to around 138.8, a factor that could also help stabilize prices in Japan, although any positive impact on prices is likely to come with a slowdown.

Meanwhile, policymakers, investors and economists will be closely watching the annual round of wage deals early next year. Kuroda said that stronger wage growth is a key factor in ensuring sustained inflation. The central bank under Kuroda has been striving for stable inflation of 2% over the past decade.

“If the spring wage negotiations go well, there will be more room for policy change next year than this year,” Maruyama said.

(adds economic comment)

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