Japan: Core inflation remains steady in May
Core consumer prices—which exclude fresh food—increased 0.20% in May over the previous month, mirroring April’s reading. May’s result marked the joint-weakest reading since January.
Year-on-year core inflation held steady at April’s 2.1% in May, the highest since 2015. Meanwhile, the trend pointed up slightly, with annual average inflation coming in at 0.5% in May (April: 0.3%). Lastly, consumer price inflation was also steady, coming in at April’s 2.5% in May, also the highest since 2015.
The tepid month-on-month growth in core inflation points towards a continued lack of demand-pull inflation. As a result, prospects for second-round effects—where higher prices push up wages which further increase prices in a vicious cycle—and therefore a sustained ratcheting up of inflation to above the BoJ’s 2.0% target remains unlikely.
Analysts at EIU commented on the outlook:
“We maintain our forecast that consumer prices will rise by an average of 2.2% in 2022, before moderating to growth of 0.5% in 2023 as external factors such as surging commodity prices subside. The BoJ will maintain negative interest rates and quantitative easing to facilitate economic growth. However, it is possible that the central bank will adjust its yield curve control setting by allowing a wider band of movement for 10-year Japan government bond yields, from the current 0.25 percentage points, in order to reduce depreciatory pressure on the yen.”