Bank of Japan Governor Kazuo Ueda speaks during a news conference, where he might address inflation trends and interest rate policy. (Reuters)
Japan’s inflation story just split in two, and that leaves the Bank of Japan trying to hike rates without looking like it is ignoring the data. February “core” CPI, which excludes fresh food, slowed to 1.6 percent, dipping below the BOJ’s 2 percent target for the first time in nearly four years. But the BOJ’s more telling gauge, which excludes fresh food and fuel, held at 2.5 percent. Investors and households get the whiplash: the headline looks like “mission accomplished,” while the underlying trend still argues for more tightening.
The mechanics are political as much as economic. The biggest drag on inflation was energy, where the return of subsidies helped drive a 9.1 percent drop in energy costs, and a gasoline tax cut shaved 0.94 percentage point off headline inflation, according to the government. Tuition also fell on expanded subsidies. Strip those interventions away and the picture is less comforting: food prices excluding fresh items rose 5.7 percent, and services inflation stayed at 1.4 percent.
That puts Governor Kazuo Ueda in a communications bind as the BOJ tries to lift borrowing costs that are still low after ending its long stimulus era. The central bank has already said it will publish a new indicator by summer designed to strip out “one-off” policy factors, a tool analysts see as a way to defend further hikes even if subsidized CPI reads soft. In other words, the BOJ is preparing to argue that the “real” inflation trend is firmer than the headline suggests.
The stakes are rising because the inflation impulse is coming from abroad while Japan’s economy is exposed to imported energy. Reuters notes the weak yen and higher oil prices linked to the Iran war are pushing up import costs, even as the government is moving to cap gasoline prices in a way analysts say could knock as much as 0.5 percentage point off core CPI. That leaves the BOJ juggling a genuine tradeoff: hike into a conflict-driven cost shock and risk denting growth and profits, or wait and risk letting underlying inflation stay above target longer than planned.
