Highest inflation in Tokyo in over three decades makes things tough for BOJ

While Tokyo's inflation is finally approaching the 2% level targeted by the BOJ, the April figures are unlikely to prompt the central bank to cut back its monetary easing

The cost of living in Tokyo rose at the fastest pace in almost three decades in April, as the impact of soaring energy prices became clearer, an outcome that complicates the Bank of Japan’s messaging on inflation and the need for continued stimulus. 

Consumer prices excluding fresh food in the capital climbed 1.9% from a year ago, according to the ministry of internal affairs Friday. Barring the impact of sales tax hikes in 1997 and 2014, that was the fastest pace of gains since December 1992. 

 

The gauge jumped after the drag on the price index from sharp cell phone fee cuts a year ago started to drop out of calculations. Analysts had forecast prices to rise 1.8%. 

While Tokyo’s inflation, a leading indicator of the national price trend, is finally approaching the 2% level targeted by the BOJ, the April figures are unlikely to prompt the central bank to cut back its monetary easing. 

The central bank demonstrated its stance last week when it doubled down on its efforts to keep borrowing costs at rock bottom levels. 

Still, as long as inflation continues to gain strength, it’s likely to become increasingly difficult for the BOJ to keep justifying the need for continued support for the economy at the potential cost of further falls in the yen.

Central banks around the globe have been forced to backtrack on their inflation views and policy as price gains once considered transient proved to have more strength and more staying power than expected. 

“A weak yen is going to add more inflationary pressures for a wider range of products as it affects all imported goods,” said Taro Saito, head of economic research at NLI Research Institute. “Price growth is no longer going to be only about soaring energy and raw material prices.”

What Bloomberg Economics Says...

“The climb in prices were mostly due to a technical factor, along with higher costs for imported food and energy -- not the wage-driven inflation the BOJ seeks. We see the BOJ sticking to its stimulus, even as other central banks unwind theirs.”

-- Yuki Masujima, economist

The BOJ remains an outlier globally as other central banks rush to tighten policy. The Federal Reserve, the Bank of England and the Reserve Bank of Australia are among the monetary authorities that have raised interest rates in response to prices this week.

The resulting divergence in policy direction has contributed to the yen’s slide to two-decade lows, a factor that will amplify inflationary pressure going ahead. The yen has shed more than 11% against the dollar so far this year, briefly hitting 131.25 after the BOJ’s decision last week.

For now, the central bank is continuing to insist the current gains in prices are not sustainable as it continues to focus on supporting the economy rather than cooling inflation. Governor Haruhiko Kuroda says Japan’s price momentum remains weak because it lacks domestic drivers such as solid wage gains and therefore the BOJ needs to keep its monetary easing in place. 

After stripping out the effect of energy and fresh food prices, Tokyo inflation was a much weaker 0.8%, a reading that offers some support for the BOJ’s case for now.

“I agree with the BOJ’s view that this inflation isn’t sustainable,” Saito said. “This is cost push inflation. We don’t have anything like strong wage growth and service prices aren’t rising as they are in other major economies.”

The April figures showed energy prices rose 25% from a year earlier, accounting for around 1.1 percentage point of gains in the overall index. The smaller drag from cheaper cell phone fees gave the index a lift of 0.8 percentage point.

Prime Minister Fumio Kishida announced fresh spending measures last week to ease the impact of rising prices on households and businesses ahead of summer national elections, a move that suggests the government will try to ease the impact of a weak yen while the central bank keeps monetary easing in place. 

The Cabinet Office estimates that the measures will shave around 0.5 percentage point off overall CPI from May through September.