Japan’s inflation stays above BOJ’s target, key gauge hits four-decade high

TOKYO: Japan’s core consumer inflation stayed well above the central bank’s 2% target in April and a key index stripping away the effects of fuel hit a fresh four-decade high, keeping alive expectations of a tweak to its massive stimulus this year.

The reading comes a few days after data showing the world’s third-largest economy grew faster than expected in the first quarter on a post-COVID consumption rebound.

The solid price and growth data leave scope for Bank of Japan (BOJ) Governor Kazuo Ueda to gradually phase out his predecessor’s ultra-loose policy, some analysts say.

The nationwide core consumer price index (CPI), which excludes fresh food but includes energy items, rose 3.4% in April from a year earlier, data showed on Friday, matching a median market forecast and perking up from a 3.1% gain in March.

The rise in April, the start of Japan’s new business year when many firms tend to modify retail prices, suggests heightening price pressures may keep inflation above the BOJ’s 2% target longer than expected, analysts say.

An index stripping away the effects of both fresh food and fuel - closely watched by the BOJ as a key barometer of domestic demand-driven price trends - rose 4.1% in April from a year earlier, marking the fastest annual pace since September 1981.

Services inflation accelerated to 1.7% in April from 1.5% in March, the data showed, suggesting that rising labour costs may be starting to feed into broader consumer inflation.

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Food prices also jumped 9.0% in April from a year earlier, accelerating from a 8.2% gain in March, highlighting the burden on households that could weigh on consumption ahead.

“Given stubborn food price pressures, we now expect underlying inflation to peak at 4.5% by mid-year,” said Darren Tay, Japan economist at Capital Economics.

“But the inflationary cycle is probably at its tail end - producer price inflation has fallen significantly over the past three months.

We therefore expect inflation to fall rapidly in the second half.“

With inflation having stayed above its target for a year, markets are simmering with speculation the BOJ will soon phase out its massive stimulus that critics say is distorting markets and hurting financial institutions’ profits.

Ueda has stressed the need to keep monetary policy ultra-loose until inflation is sustainably around 2% and accompanied by wage hikes.

He has also said Japan’s core consumer inflation will slow back below 2% toward the latter half of the current fiscal year ending in March 2024.