INSIGHT: Japan October inflation at 40-yr high amid yen slump, no rate hikes

Pearl Bantillo

18-Nov-2022

SINGAPORE (ICIS)–Japan’s core consumer inflation, excluding food prices, hit a 40-year high in October at 3.6% as the sharply weakened yen bloated import bills and with the country’s central bank not budging on its ultra-low interest rate policy.

The year-on-year increase in the consumer price index (CPI) is projected to decelerate below 2% in the next fiscal year starting April 2023, Bank of Japan (BoJ) governor Kuroda Haruhiko said in a speech before the Committee on Financial Affairs of Japan’s House of Representatives on Friday.

“Given such developments in economic activity and prices, the Bank will continue with monetary easing, aiming to firmly support Japan’s economy and thereby achieve the price stability target of 2 percent in a sustainable and stable manner, accompanied by wage increases,” he said.

The world’s third-biggest economy “is on its way to recovery from a downturn caused by COVID-19 and uncertainties for the economy have been extremely high”, Kuroda said.

BOJ TO REMAIN AN OUTLIER
“The year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food has accelerated due to rises in prices of such items as energy, food, and durable goods,” he said.

“It is expected to decelerate from the beginning of calendar year 2023 toward the middle of fiscal 2023 because the contribution of such price rises to this CPI is likely to wane,” the central bank chief said.

“Thereafter, it is projected to accelerate again moderately on the back of improvement in the output gap and rises in medium- to long-term inflation expectations and in wage growth,” he added.

Noting that high interest rates would seriously stifle recovery, the Japanese central bank has been bucking the global trend of hiking interest rates since to the start of the year to combat inflation.

In its last monetary policy meeting on 28 October, BoJ maintained its minus 0.1% benchmark interest rate.

BoJ’s dovish monetary policy stance has severely battered the Japanese yen, which has lost more than a fifth of its value since the start of the year against the US dollar, whose strength lies in the US Federal Reserve’s aggressive rate hikes.

YEN SLUMP CAUSES RECORD TRADE DEFICIT
The yen had plunged to a 32-year low of nearly Y152 against the US dollar in October, before recovering, aided by repeated government intervention. On Friday afternoon, the yen was trading at about Y140 to the US dollar.

Resource-scarce Japan posted a record trade deficit of Y2.16tr ($15bn) in October, as imports continued to surge as a consequence of the weak yen. Imports for the month surged 53.5% year on year to an all-time high of Y11.2tr, eclipsing exports’ 25.3% increase to Y9.0tr, official data show.

While the weak yen is a boost to exports, a global economic slowdown dampens external demand for Japan-made products. Its export volume of plastic materials in October declined by 14.2% year on year to 450,909 tonnes.

In the third quarter, the Japanese economy unexpectedly shrank 1.2% year on year as consumption was weighed down by high inflation and the yen slump.

Private consumption, which makes up half of Japan’s GDP, posted a 0.3% growth in July-September 2022, a sharp deceleration from the 1.2% pace set in the previous three months.

HOPE RIDING ON CARS
Recovering car production is expected to cushion the Japanese economy’s downturn. This should buoy related industries, including petrochemicals into 2023..

The automotive sector has a sizeable share to Japan’s total industrial production.

Its car exports – which accounted for an 11.8% share of total exports in October – stayed on a growth path for the third consecutive month, logging a 28.1% increase in volume to 376,636 units, with value surging 85.5% to Y1.06tr, up 11.8% year on year.

Insight article by Pearl Bantillo

($1 = Y139.8)

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