Japan: Consumer prices inflation climbs to fresh high – Capital Economics

Marcel Thieliant, Senior Japan Economist at Capital Economics, point out that the surge in Japan’s inflation in January was mostly due to a jump in volatile fresh food prices but underlying inflation also continued to strengthen.

Key Quotes

“A 12.5% y/y jump in fresh food prices lifted headline inflation from 1.0% to 1.4% y/y, the highest it has been since July 2014 allowing for the impact of tax changes. Meanwhile, inflation excluding fresh food held steady at 0.9% y/y as energy inflation slowed from 7.7% to a six-month low of 6.7%. Despite the rise in crude oil prices in recent months, petroleum inflation continued to slow and so did prices of electricity and gas. However, the Bank of Japan’s preferred measure of underlying inflation, which strips out energy in addition to fresh food, edged up from 0.3% y/y to 0.4%. “Core” goods inflation strengthened slightly whereas service inflation was unchanged at 0.1% y/y.”

“Looking ahead, we expect crude oil prices to fall to $60 by year-end, from $66 today. While energy inflation should pick up again towards the middle of this year, it should start to slow towards year-end. Meanwhile, producer prices of consumer goods have recently started to moderate as the exchange rate has strengthened. And with wage growth still muted, a marked pick-up in service inflation is not on the cards. The upshot is that the Bank of Japan’s 2% inflation target remains out of reach. We reiterate our view that the Bank will leave both its short-term policy rate as well as its target for 10-year bond yields unchanged for the foreseeable future.”