Japan’s key price indicator slipped in March after hitting 1 percent in February, yet the underlying trend is seen remaining intact as Bank of Japan Gov. Haruhiko Kuroda begins his second term vowing to achieve 2 percent inflation.
Consumer prices excluding fresh food rose 0.9 percent in March from a year earlier. Stripping out fresh food and energy, prices climbed 0.5 percent. Overall prices gained 1.1 percent. Nationwide, energy prices rose 5.7 percent from a year earlier in March, contributing 0.42 percentage points to price gains.
Excluding fresh food, inflation for the fiscal year that ended in March 2018 was 0.7 percent. While that’s the highest since 2014, it’s below the BOJ’s forecast of 0.8 percent.
The central bank had been making progress in generating inflation, with domestic demand picking up, although the yen’s rise has complicated the outlook. This month Kuroda said he was confident the target would be reached next year, at which point the BOJ would start considering how to normalize monetary policy over the rest of his term.
Japan’s inflation edging down reflects fading base effects from energy prices, and lower fresh food and import costs, according to a report from Bloomberg Economics Yuki Masujima. “Even so, upward pressure from the positive output gap and pickup in wage growth is likely to sustain a broad trajectory of moderate increases,” he wrote. “If oil prices are stable, core inflation may clearly exceed 1 percent in 3Q, in our view.”
Although it’s far from 2 percent, inflation excluding fresh food will be anchored above 1 percent over the coming months, according to Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “When you look at the current labor market and wages, the economy isn’t that bad.”
“Food and energy prices are supporting CPI right now,” said Hiroaki Muto, chief economist at Tokai Tokyo Research Center. The recent rise in the yen should start showing an impact from May or June, and the rise in food prices should slow, he said.
“A stable core CPI increase of 1 percent still faces steep hurdles” and the BOJ will have no choice but to keep delaying its 2 percent inflation goal, Muto said.
“The underlying trend hasn’t changed because inflation excluding fresh food and energy remained the same,” said Maiko Noguchi, a senior economist at Daiwa Securities Co. and a former Bank of Japan official. “I think that’s the measure the BOJ really cares about because the bank can’t achieve 2 percent in a stable manner if it fails to rise from the current 0.5 percent.”