Japan's Inflation Slows for First Time Since April Ahead of BOJ

Japan’s key inflation gauge slowed in September for the first time in five months, ahead of a central bank meeting later this month where the board is widely expected to keep the interest rate unchanged.

(Bloomberg) — Japan’s key inflation gauge slowed in September for the first time in five months, ahead of a central bank meeting later this month where the board is widely expected to keep the interest rate unchanged. 

Consumer prices excluding fresh food rose 2.4% from a year earlier, decelerating from 2.8% in August as government utility subsidies tamed the impact of ongoing inflation, according to the Ministry of Internal Affairs Friday. The result came in slightly stronger than the consensus estimate of 2.3%. 

The slowdown in price gains largely hangs on government subsidies, thus it is likely to have a limited amount of impact on the Bank of Japan’s policy path, provided there are no other signs of weakening in the trend. For Prime Minister Shigeru Ishiba, a waning of inflation may help his case as he heads into a general election on Oct. 27.

Overall inflation slowed to 2.5% from 3.0% in August. Drops in electricity and gas prices drove the gauge lower, with the government’s subsidies knocking 0.55 percentage point off. 

A deeper index excluding energy costs and fresh food prices rose to 2.1% from 2.0% in the previous month. Service prices, seen by the BOJ as a key measure to examine the price trend, gained 1.3% from a year earlier, slowing from 1.4% in August.

The BOJ is widely expected to leave the benchmark rate at 0.25% on Oct. 31. The central bank’s communication remains in focus after the BOJ came under fire over the timing of its last interest hike in July, given the global market crash that followed shortly afterwards. 

The bank has maintained its stance that it will reduce monetary easing further with additional rate hikes, if inflation develops in line with its own projections. The BOJ’s outlook will also be updated at the end of the month. 

What Bloomberg Economics Says…

“The BOJ is waiting to see how the US economy holds up before raising rates further. We think it will be able to confirm a US soft landing by the time it holds its January board meeting.”

— Taro Kimura, economist 

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