Japan’s core inflation rate rose to a new 41-year high of 4 per cent in December, adding to mounting market pressure on the Bank of Japan to abandon its yield curve control policy which has helped maintain ultra-low interest rates.
Official statistics released on Friday showed core inflation, which excludes volatile food prices but includes oil, reached its fastest pace since December 1981, exceeding the Bank of Japan’s 2 per cent inflation target for the ninth consecutive month.
While price rises in Japan remain mild compared with those in the US and Europe, inflation in Asia’s most advanced economy has gained pace due to a weaker yen and heavy exposure to the increasing cost of imported commodities.
Energy prices were a main driver of December’s price rises, increasing 15.2 per cent, but inflation excluding energy also hit a 30-year high, climbing 3 per cent.
The yen weakened 0.4 per cent against the US dollar following the data release on Friday, reversing the previous day’s gains.
The release came two days after Japan’s central bank defied market pressure and maintained its ultra-loose monetary policy, arguing that wage growth was not strong enough to sustainably achieve its inflation target.
Uniqlo owner Fast Retailing and other large companies have in recent weeks announced plans to dramatically raise wages, fuelling hopes that rising prices could finally drive salaries higher in a country that has wrestled with three decades of price stagnation.
But economists remain divided on whether the wage increases are a one-off, and wider inflationary pressures are expected to subside after government curbs on gas and electricity prices take effect.
“It’s highly possible that this December year-on-year rise in core inflation was the peak,” said Takahide Kiuchi, executive economist at Nomura Research Institute.
The BoJ on Wednesday raised its core inflation outlook for the fiscal year ending in March to 3 per cent, up from a previously forecast 2.9 per cent.
But the central bank expects the year-on-year rise in core inflation to fall below 2 per cent in the next two fiscal years and has cited the forecast as another reason to preserve its yield curve controls to support the economy.
Higher inflation and recent turmoil in the Japanese government bond market had raised market expectations that the BoJ would pivot from its massive monetary easing programme by further loosening its yield target or abandoning the policy altogether.
The central bank deployed the equivalent of about 6 per cent of Japan’s gross domestic product over the past month on buying bonds to try to hold yields within its target range after prices surged.
In December, the central bank said it would allow yields on 10-year bonds to fluctuate by 0.5 percentage points above or below its target of zero. Scrapping the cap on yields would have effectively pushed up interest rates for longer-term government debt.
Additional reporting by William Langley in Hong Kong
