Commentary Directory

Japan's Core Inflation Resumes Uptrend in July

Jacob Hess
August 18, 2023

Japan’s CPI is in focus as we get another important update on inflation following the Bank of Japan’s initial shift in policy. In July, the YoY increase in consumer prices was 3.3%, unchanged from June, after a relatively strong monthly increase of 0.5%. This was the largest in the last three months. Food inflation resumed its fast pace after no growth in June, up 0.8% MoM and 8.8% YoY. The annual rate of good price growth was the largest since 1976. Offsetting that increase was a drop in energy prices, down -1.1% MoM and -8.7% YoY (a deeper decline than the June drop of -6.6% YoY). For now, these trends are moving against each other, but that could change in the near future. Energy prices in particular have seen an uptick in the most recent month and would put upward pressure on the headline index. Food prices should peak soon with high bases coming into effect later this year, but that trend will be harder to reverse.

From Statistics Bureau of Japan

The Bank of Japan is mostly interested in underlying inflation dynamics and seeing some stickiness there before continuing with normalization. In July, it got another month of core CPI inflation at or above 2.5% with increases of 0.5% MoM and 2.6% YoY (a slight uptick from 2.5% YoY in June). Furniture and household goods prices provided a substantial increase to the core component, up 0.4% MoM after a decline last month. While durables prices eased, non-durable goods prices jumped 2.1% MoM. Another segment contributing to the increase in core prices was culture and recreation, increasing 2.1% MoM thanks to a surge of 3.2% MoM in recreational services. These areas of strength were offset by deflation in clothing (-1.2% MoM), housing (0.0% MoM), and miscellaneous categories (-0.1% MoM).

From BoJ

The bottom line is that inflation is being driven by consumer demand for non-durables and services with the latter likely still maintaining momentum from the resurgence of travel and tourism demand that gathered following the lifting of major restrictions during the COVID pandemic. Thanks to a stronger-than-expected economy, Japanese households have been able to maintain a level of demand suitable to a moderately inflationary environment. The Bank of Japan confirmed its belief that inflation will be able to be held above the 2% target in its most recent outlook on the economy and prices as it increased the fiscal year 2023 forecast for core CPI from a median estimate in April of 2.5% YoY to a median estimate in July of 3.2% YoY. This report is largely supportive of that outlook especially since there was a reversal in many areas that saw deflation on a MoM basis in June. With that being said, this should give the BoJ members and the new BoJ Governor a green late to proceed with more normalization. Although, they will act very gradually so as to not disturb the fragile reflation.