Japan’s inflation rises to 2% to complicate BOJ stimulus messages

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(Bloomberg) – Japan’s inflation has hit its fastest pace since 2008, after the Bank of Japan cut tax increases to the top of its target, a result that will complicate Governor Haruhiko Kuroda’s message that stimulus must continue.

Consumer prices excluding fresh food rose 2.1% in April from a year earlier, according to the interior ministry on Friday. Economists had expected core inflation to rise to 2% from 0.8% in the previous month.

The sharp acceleration was mainly due to the fading of the effect of low-cost phone fees from a year ago, which masked the effects of rising electricity prices.

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The result is that the BOJ is less likely to consider policy adjustments due to its goal of a stable 2% price increase. The central bank has insisted that current cost-push inflation is not sustainable.

What Bloomberg Economics says …

“The jump is probably due to a large number of statistical distortions – not the wage-driven gains that the BOJ seeks. Because of this, the central bank is unlikely to be deterred from pursuing its ultimate simplification – even other major central banks tighten policy. “

– Yuki Masujima, economist

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Still, the actual figures are now above the bank’s target level, and market speculation about policy normalization is likely to continue. Public dissatisfaction with the rising cost of living could also increase if inflation continues to rise, raising questions about why the government is supporting the BOJ’s position.

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Both reasons present a communication challenge for the central bank as it seeks to justify why it continues with rock-bottom interest rates while its global counterparts are raising borrowing costs to cope with inflation.

Statistics show that strength was the main upside factor in Japan’s consumer price index, accounting for 1.4 percentage points. Processed foods rose 2.6% on the indication that more companies are incurring higher costs to consumers, adding to the cost of living.

Read more: Japan’s inflation tipping point closer to inches as prices rise

The index has shrunk from 1.4 percentage points in the previous month to 0.4 percentage points on the back of cheap phone charges, which is responsible for most of the jump in the inflation figure since March.

Prime Minister Fumio Kishida approved an additional budget earlier this week to help families and organizations affected by high prices keep their public approval ratings in good shape ahead of a summer election.

By providing assistance, the government is giving the BOJ more opportunity to continue its easing measures, even after the yen set a new two-decade low earlier this month, a factor driving higher import prices.

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