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Japan’s core inflation slows as energy prices fall

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Japan’s consumer price growth in July slowed from the previous month, nudged lower by falling energy prices and complicating central bankers’ task as they debate a historic shift in monetary policy.

The “core” inflation rate, which excludes volatile fresh food prices, retreated to 3.1 per cent in July from 3.3 per cent the previous month.

The reading, released on Friday and in line with economists’ forecasts, marked the 16th consecutive month that the index exceeded the Bank of Japan’s target of 2 per cent.

The lower rate supported some central bankers’ belief that Japanese inflation had peaked after reaching its highest level in four decades this year following a long period of negative or near-zero growth.

Higher prices, along with interest rate rises by other major central banks, have put pressure on the BoJ as it considers unwinding its ultra-loose monetary policy, which includes the world’s only negative rates.

Headline inflation, which includes fresh food prices, remained flat from the previous month at 3.3 per cent. Food price inflation has proven particularly resilient and remains vulnerable to external jolts such as Russia’s withdrawal last month from the Black Sea grain deal, noted Moody’s Analytics senior economist Stefan Angrick.

But stripping out energy and fresh food prices showed inflation accelerated to 4.3 per cent in July from the previous month’s 4.2 per cent as hotel charges, travel and other leisure-related services prices rose during the summer.

This “core-core” index is closely scrutinised by the BoJ for underlying inflationary trends and is a central focus of monetary policy meetings.

“All of this complicates the picture for monetary policy,” said Angrick, adding that the central bank would need evidence of stronger domestic demand before altering its ultra-loose monetary stance.

Last month, the central bank announced that it would allow yields on long-dated government bonds to rise as high as 1 per cent, in effect relaxing its yield curve control policy.

But Kazuo Ueda, the BoJ’s new governor, cautioned against unwinding its policy quickly, arguing that price rises were not being driven by strong consumer demand and would fall as costs of imported commodities retreated.

Despite a strong preliminary reading this week that showed Japan’s economy expanded at an annualised rate of 6 per cent in the second quarter — reflecting a rebound in foreign tourist arrivals attracted to the weak yen — recent data has not painted a picture of robust domestic demand.

“Inflation remains predominantly supply-driven,” said Angrick. “Our best guess is still for the BoJ to stay on hold for the time being, but the possibility of surprises has increased.”

According to a summary of the BoJ’s July monetary policy meeting, one committee member forecast that inflation would fall below the bank’s target in the second half of the financial year ending March 2024.

Marcel Thieliant, Japan economist at Capital Economics, said a sharp fall in import prices in July meant the rate of goods inflation would probably begin to decline in earnest.

“The key question is whether services inflation can pick up the baton, but with unit labour costs barely rising and consumer spending starting to falter as real incomes are falling sharply, we doubt that it will,” he wrote in a note to clients, adding that the BoJ was likely to keep its policy rate unchanged for the foreseeable future.

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