As several measures of broad price trends in Japan have reached record highs in July, analysts are saying the nation is seeing early signs of a persistent inflation which will require policymakers back away from its decades-long attachment to an ultra-loose monetary policy.
The Bank of Japan (BOJ) utilizes the government’s consumer price data to produce several measurements of underlying inflation data which examine the distribution of price changes.
The BOJ watches the indices closely to see if price increases are driven by temporarily volatile factors like fuel price swings, or if the trend is broadening enough to maintain inflation near the bank’s 2% target.
The “trimmed mean” index, which removes the upper and lower tails of the graph, increased a record 3.3% for July year over year, according to the data released on Tuesday. That was an increase over the 3.0% it had registered in June.
The “mode” index, which looks at the most frequently registered rate of inflation in the data also increased a record 3.0% for July, which was the sixth straight month it exceeded the bank’s 2% target.
In July, the ratio of items which saw year over year price increases reached a record 85.6% in July. The ratio continued its rise after the low seen in January of 2021.
Naoya Hasegawa, senior bond strategist at Okasan Securities said, “The results show not just that trend inflation accelerated in July, but that companies continued to steadily pass on costs. The outcome could prod the BOJ to become more upbeat on the price outlook.”
Annual core consumer inflation reached 3.1% in July, a decrease from 3.3% in June, after utility bills eased somewhat. However it remained above the bank’s 2% target for a 16th consecutive month.
In July, the BOJ issued a quarterly report which noted there were “signs of change,” on corporate wage and price setting which could lead to a sustainable attainment of the bank’s target rate.
That analysis was partially the reason the BOJ decided last month it would allow a more free rising of long-term interest rates in line with inflation, a move markets see as a gradual shift away from decades of massive monetary stimulus.
The Governor of the BOJ, Kazuo Ueda, has said the bank intends to maintain an ultra-loose monetary policy until a more sustainable inflation driven by robust domestic demand and higher wages emerges out of the more recent cost-driven price hikes.
