Japan inflation shows no sign of easing as yen slides further

Consumer prices remain hot in Japan, new data shows, as businesses make up for lost time in passing on higher costs and a weak yen adds to the pressure.

The core consumer price index, which excludes fresh food, rose 3.2 per cent in May from a year earlier, the Ministry of Internal Affairs and Communications said on June 23, marking nine consecutive months above 3 per cent, Nikkei Asia reports.

Although energy-price-driven inflationary pressures have receded from peaks in Western economies, Japan has lagged behind in terms of passing through higher costs to consumers.

Meanwhile, Japan's currency is losing value against its peers, weakening to the high 143-yen level against the dollar on June 23.

Each time the yen weakens by 10 per cent against the dollar, inflation climbs by 0.15 percentage point, according to an estimate by the Cabinet Office. The yen was down around 8 per cent earlier on Friday compared with the end of last year.

This creates a dilemma for the Bank of Japan, which has forecast inflation to moderate.

"There's the effect of the weak yen along with the June electric rate hikes by power companies, so there is a possibility that inflation will continue moving at the 2 per cent and 3 per cent levels throughout the year," said Shunsuke Kobayashi, chief economist at Mizuho Securities.

Inflation slowed somewhat in May compared with April's 3.4 per cent pace due to a drop in energy prices. But it is still well above the BOJ's 2 per cent target for price stability.

The "core-core" inflation rate, which leaves out fresh food and energy prices, accelerated to 4.3 per cent in May, up 0.2 percentage point from April.

Many economists favour the core-core rate as an indicator because it strips out two highly price-volatile categories, showing a better picture of the underlying trend. May's core-core inflation is the highest since June 1981.

Food made up about 60 per cent of the increase in core inflation in May. Chocolate rose 14.4 per cent while ice cream jumped 10.1 per cent. Prices of services are also going up as Japan emerges from the COVID-19 pandemic and foreign tourists return. Lodging prices climbed 9.2 per cent in May, 1.1 point faster than in April.

Government measures to control energy prices, as well as travel incentives, have softened the blow. Without those measures, May's core inflation rate would have been 4.3 per cent, according to the internal affairs ministry, more than the 4 per cent rate in the US.

Because Japan maintained COVID-related restrictions longer than other economies, cost pass-throughs were delayed. Between March 2021 and May 2023, only about 30 per cent of the rise in corporate goods prices was reflected in consumer prices in Japan, compared with about 80 per cent in the US and roughly 40 per cent in the eurozone.

Among the last increases, Nissin Food Products bumped up retail prices about 10 per cent for 80 per cent of instant noodles this month.

After last week's monetary policy meeting, BOJ Gov. Kazuo Ueda told reporters inflation has been higher than expected. The BOJ forecasts core inflation will dip below 2 per cent later in the current fiscal year, but some doubt that view.

Takahide Kiuchi, executive economist at Nomura Research Institute, said, "It is highly likely that inflation will decline at a time frame later than what the BOJ forecasts due to the yen's current depreciation." 

Wage increases have not kept up with consumer prices. Inflation-adjusted real wages undershot year-earlier figures for 13 straight months through April.

Saisuke Sakai, senior economist at Mizuho Research and Technologies, said inflation will likely stay elevated until at least the latter part of the calendar year due to cost pass-throughs.

However, "if the yen appreciates due to economic downturns overseas or other factors, the inflation rate could fall to the 0 per cent range as early as the latter half of fiscal 2024," said Sakai.