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Japan's inflation hits nine-month high, central bank rate changes more complex

TraderKnows
TraderKnows
06-12

Recent data released by the Bank of Japan show that the country's inflation rate has reached its fastest pace in nine months, which may result in changes to the Bank of Japan's interest rates.

In May, Japan's wholesale inflation rate rose at the fastest annual growth rate in nine months, data showed, as the yen's depreciation increased the cost of importing raw materials, putting upward pressure on prices.

This data complicates the Bank of Japan's decision on when to raise interest rates. Analysts say price increases driven by cost pressures could curb consumption and reduce the chances of achieving demand-driven inflation, which the central bank hopes to see before gradually scaling back stimulus measures.

"With wholesale prices accelerating again and energy prices expected to rise sharply in the summer, consumer inflation may not slow down significantly," said Takeshi Minami, chief economist at Norinchukin Research Institute. "The government’s subsidies for utility bills will end in June."

"But the Bank of Japan needs to wait for wages to rise and help consumption recover" before raising rates again, he added.

The Bank of Japan data showed that the Corporate Goods Price Index (CGPI)—a gauge of prices for goods and services traded between firms—rose 2.4% year-on-year in May, exceeding market expectations of 2.0%.

This increase, the fourth consecutive month of acceleration since April's 1.1%, was mainly due to rising prices for utilities, petroleum and chemical products, and non-ferrous metals, the data showed.

The index reflecting prices of imported goods in yen terms rose 6.9% year-on-year in May, accelerating from April's 6.6%, indicating that the recent depreciation of the yen has driven up costs for importing raw materials.

This data is likely to be scrutinized by the Bank of Japan at its two-day policy meeting ending on Friday. The central bank is expected to keep its short-term interest rate target between 0% and 0.1% unchanged.

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Inflation

Inflation refers to the phenomenon where the purchasing power of a country's (or region's) currency decreases, leading to a general rise in the prices of goods and services. It is reflected in the fact that, over a certain period, the same amount of money can only buy fewer goods and services.

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