Japan consumer price measure reaches highest level in 41 years

An important gauge of Japan’s consumer prices rose at the fastest pace in 41 years in February, increasing the challenges for the incoming central bank governor to steer monetary policy while inflation has proved stickier than expected.

Continuing price pressures, combined with bigger-than-expected wage increases among large companies, have overshadowed the Bank of Japan’s forecast that inflation is not driven by underlying strong consumer demand and will slow as the cost of imported commodities falls.

Analysts say the inflation readings will raise pressure on Kazuo Ueda, who takes the helm of the BoJ in April, to make a shift in the bank’s ultra-loose monetary policy and abandon its practice of holding down yields on government bonds.

The core consumer price index, excluding fresh food prices, rose at an annual rate of 3.1 per cent in February, slowing sharply from a 4.2 per cent rise in January as government subsidies to curb electricity and gas prices kicked in. The decline, which was in line with market expectations, was the first in 13 months.

The so-called core-core CPI, which strips out energy and food prices but includes alcoholic beverages, rose 3.5 per cent, the fastest year-on-year increase since January 1982. Even the CPI that excludes all types of food and energy grew 2.1 per cent, exceeding the BoJ’s target.

“The core-core CPI does seem stronger than expected,” said Masamichi Adachi, chief Japan economist at UBS. “The pass-through [from wholesale prices to consumer prices] that did not happen last year is now occurring.”

The price pressures come after the annual shunto round of wage talks when Japan’s major companies agreed to grant an average pay rise of 3.8 per cent for the financial year that begins in April. The offer exceeded market expectations.

Excluding seniority-based pay, the growth in base salaries reached 2.3 per cent, compared with 0.5 per cent a year earlier, according to trade union confederation Rengo.

While the final increase may be lower after wage talks for smaller companies, Kentaro Koyama, chief Japan economist at Deutsche Securities, wrote: “We conclude that this year’s shunto results are not just a one-time phenomenon but a vital step forward in the shift in Japan to an inflationary equilibrium.”

Unlike in the US, inflation in Japan’s services sector has been weak — rising 1.3 per cent in February — as wages have remained stagnant for most of the past three decades. The BoJ has thus argued it needs to continue its monetary easing stance until there is a transmission from rising prices to growing wages.

UBS’s Adachi said he now expected the BoJ to end its longstanding yield curve control policy in June or July.

He added the central bank was likely to maintain negative interest rates in light of the turmoil in global financial markets caused by the collapse of US lender Silicon Valley Bank and the sale of Credit Suisse to Swiss rival UBS.