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All eyes on BoJ’s next move as Japan’s inflation outpaces United States

According to official data released, Japan's core consumer inflation reached 3.3% year-over-year last month, up from 3.2% in May

Consumer prices in Japan increased at a faster pace in June 2023, continuing their 15-month streak of growth over the central bank’s objective.

According to official data released, Japan’s core consumer inflation reached 3.3% year-over-year last month, up from 3.2% in May. The growth rate has outpaced the inflation figures of the United States, where the ratio currently stands at 2.97%, thus coming down from the 2022 figure of 9.06%.

After increasing by 4.3% in May 2023, core inflation, which includes the cost of fuel and food, decreased to 4.2%.

The Bank of Japan (BoJ) is now anticipated to maintain the benchmark rate at -0.1% and maintain its ultra-loose monetary policy as other central banks raise interest rates to contain inflation.

According to Masamichi Adachi, an economist at UBS Securities, the inflation data did not indicate that the BoJ will make any significant policy changes.

“It’s pretty clear that inflation will slow from here as import-driven price gains taper off,” Adachi told the media.

Japan’s inflation has been much less severe than that of nations like the United States and the United Kingdom, despite being at a four-decade high and over the BOJ’s long-term aim of 2%.

Since the early 1990s, when a sizable asset bubble popped, Japan has alternated between sluggish price rises and deflation.

With varying degrees of success, the central bank has pursued a strategy of extremely low and even negative interest rates to stimulate the third-largest economy in the world.

Meanwhile, in revised predictions announced, the Japanese government has lowered its expectation for 2023’s economic growth but anticipates inflation to dramatically surpass its 2% objective, admitting rising indications that the nation’s deflationary mindset is changing.

The projections come ahead of the much-awaited Bank of Japan policy meeting, when the board will release new quarterly forecasts and discuss how far along the economy is in sustaining the achievement of its 2% price objective.

“Japan’s economy is recovering moderately with positive signs emerging, such as steady wage hikes and strong corporate spending appetite,” Prime Minister Fumio Kishida said.

CLSA Japan strategist Nicholas Smith told CNBC that the BoJ has been “wrong-footed” on inflation.

“They watched the Fed say that inflation was transitory, and be made to look fools for doing so,” Nicholas Smith remarked.

“They decide to ignore that and continue to forecast this fiscal year, 1.8% inflation. Inflation has been above 2% for 15 months in a row,” the expert added further.

Barclays economist Tetsufumi Yamakawa has also said that much of the market still appears to view rising prices in Japan as “transitory,” attributing it to a “cost-push” instead of a “demand pull.”

He also saw a “gradually strengthening possibility” that sustained inflation will materialize with the large wage hikes resulting from the latest wage negotiations, or the so-called “shunto.”

“We expect ‘shunto’ wage hikes to be smaller in fiscal year 2024 than in fiscal year 23, but forecast an increase of around +3%, which would be consistent with +2% price stability target,” Tetsufumi Yamakawa wrote.

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