TOKYO, JAPAN – AUGUST 23: Bank of Japan Governor Kazuo Ueda attends a meeting of the economic affairs committee in the lower house of parliament on August 23, 2024 in Tokyo, Japan.
Tomohiro Ohsumi | News Getty Images
The Bank of Japan is widely expected to stick with its monetary policy tightening campaign as inflationary pressures in its capital, Tokyo, confirm the bank’s economic forecasts. However, market participants remain divided on the timing of the next hike.
“My money is on another rate hike in October,” Stefan Angrick, senior economist at Moody’s Analytics, told CNBC via email. He predicted the hike would be followed by at least one more in 2025, possibly as early as January.
Japan is likely to continue to see “jump” inflation in the near term, Angric said, noting government efforts to curb energy subsidies. While Prime Minister Fumio Kishida has pledged to extend support for household utility bills, he acknowledged these measures “it cannot go on forever.”
However, Kazuo Momma, a former BOJ official and currently executive economist at Mizuho Research & Technologies, expects the central bank to keep interest rates unchanged in October. Its base case includes a January increase to 0.5% and a further increase to 0.75% in July. Momma said this will lead Japan’s monetary policy to its final position in this tightening cycle.
On Friday, the data showed headline inflation for Japan’s capital, Tokyo it accelerated to 2.6% in August from last year, faster than a 2.2% rise in July. Core inflation, which strips out the volatile cost of fresh food, rose 2.4% from a year ago. That’s faster than the median market forecast and July’s reading of 2.2%, accelerating for a fourth straight month.
However, Momma said “the momentum is not strong enough” yet for the BOJ to raise interest rates. As the central bank monitors global financial market risks, he said the BOJ has “no good reason to rush right now.”
The upbeat monthly CPI data is affected by recent “policy flip-flops,” Moody’s Angrick said, referring to various counterproductive policies in place. He explained that the government is providing some subsidies while withdrawing other support measures. This, in his opinion, shows “an unwillingness to provide effective support”.
Price pressures from demand remained subdued and employment conditions are softening, Angrick said, noting that the upcoming Lib Dem election adds further uncertainty to the political path ahead.
Japan’s unemployment rate in July also rose to 2.7%, up 0.2 percentage points from June, according to government data released on Friday. Economists polled by Reuters had expected the unemployment rate to rise to 2.5% in July.
“At best, additional rate hikes will weigh on growth,” Angrick said, “at worst, they could precipitate a broader recession.”
Tokyo’s CPI is a leading indicator of national trends and has been accelerating as wages rise nationwide and the government tries to phase out energy subsidies, alongside a weak yen.
However, core inflation should fall below 2% in the coming months, Marcel Thieliant, head of Asia Pacific at Capital Economics, wrote in a client note.
The BOJ surprised markets in July by raising interest rates to 0.25%, a 15-year high, and outlining plans to scale back its massive bond-buying program.
BOJ Governor Kazuo Ueda he recently told parliament the central bank is poised to raise borrowing costs further if inflation continues to rise above its 2% target.
