Inflation slows in Japan

Inflation in Japan slowed more than expected during August, emphasizing the challenges facing Tokyo as it attempts to reach its 2% inflation target. Core CPI rose 3.1% y/y, which was less than an expected 3.2% y/y increase and less than the prior month’s 3.3% y/y jump. Once the effect of April’s hike in the sales tax is taken into effect, the real rate of inflation is somewhere around 1.1%.

The BOJ has higher hopes for inflation

While inflation is clearly well below the BOJ’s target, the bank is likely comfortable with inflation around 1% at the moment, especially given the weakening yen. However, it is forecasting a rise in inflation further down the track, thus if consumer prices don’t begin to grow at a faster pace in coming quarters the BOJ may be forced to step in. Governor Kuroda and his colleagues at the BOJ have repeatedly expressed their willingness to pump more stimulus into the economy if needed to support inflation.

More stimulus may be needed

According to Bloomberg, 32% of analysts surveyed expect the bank to ease policy further by the end of the year and 23% expect action in April or later, while 26% don’t expect the BOJ to do more. We think the prospects for the Japanese economy, even with a weakening yen, aren’t bright enough to push inflation to the BOJ’s target, thus we expected another round of stimulus from the bank. It’s possible that the BOJ will ease further as soon as October when it revaluates its growth and inflation forecasts.

Core CPI (excluding fresh food) y/y

Source: Bloomberg, FOREX.com