Core inflation remained subdued in May, yet again highlighting how far off the Bank of Japan is in hitting its 2 percent price goal despite over five years of massive stimulus.
The stubbornly weak inflation is also another reason why the central bank is widely expected to take some time before exiting its ultraeasy monetary policy, even as the U.S. Federal Reserve and the European Central Bank are far down the road in rolling back crisis-era policies.
The core consumer price index, which includes oil products but excludes volatile fresh food prices, rose 0.7 percent year-on-year in May, unchanged from April, and matching economists’ median estimate, Ministry of Internal Affairs and Communications data showed on Friday.
The data came after the central bank last Friday cut its inflation assessment, meaning the BOJ will be in no hurry to begin tapering its massive stimulus.
“The Bank of Japan has had little success in lifting inflation expectations among households and firms,” said Marcel Thieliant, senior Japan economist at Capital Economics. “The upshot is that monetary policy tightening remains a long way off.”
The economy is expected to rebound in the second quarter from a contraction the first quarter that ended the longest growth streak since the 1980s bubble economy. And risks to the country’s economic outlook abound, not least from a heated China-U.S. trade spat that has roiled financial markets.
A private survey on Friday showed that manufacturing activity expanded in June at a faster pace than the previous month, but export orders contracted for the first time in almost two years in a warning sign about overseas demand.
The BOJ’s nine-member board is expected to scrutinize why inflation remains stubbornly subdued when it meets next month to conduct a quarterly review of its long-term growth and price projections.
BOJ board member Yukitoshi Funo said on Thursday that he saw recent weak inflation as temporary, but added that structural factors such as the advance of internet shopping and stiff competition among mass-merchandise retailers are weighing on prices.
Given the continued tepid inflation, analysts say the central bank will be keenly analyzing near-term and structural factors that are influencing prices.
“The BOJ is in a bind. If it stresses structural factors too much, that may be seen as a sign that it could adjust interest rates even before inflation rises substantially, which would cause the yen to rise, pushing down prices again,” said Chotaro Morita, chief rates strategist at SMBC Nikko Securities.
Some economists say the BOJ should make its 2 percent inflation target a more flexible and longer-term objective, rather than persisting on achieving it.
Still, chances of the BOJ ditching the target altogether are seen as low given the risk of a return of a strong yen because the price goal is shared among major central banks.
Friday’s data showed the so-called core-core inflation index, which excludes fresh food and energy prices and is similar to the core index used in the United States, rose 0.3 percent in the year to May, slowing for two straight months.
Analysts see core consumer inflation moving sideways for the time being with a slowdown in price gains in electricity and household durable goods offsetting rises in the cost of fuel.
The BOJ kept its short-term interest rate target at minus 0.1 percent last Friday and affirmed a pledge to guide 10-year government bond yields around zero percent.
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