Japan's core annual inflation hit a new decade-high in June on rises in energy costs, but with most other prices stable the data contained little that would distract the Bank of Japan from fears of an economic recession. With few signs that rising commodity costs are pushing up wages and other prices, many economists expect the central bank to hold off on raising interest rates for this year and possibly well into next year.
"Prices are rising, but I don't think the Bank of Japan has a choice about raising interest rates for at least another year because prices are not being pushed up by demand," said Yoshikiyo Shimamine, chief economist at Dai-ichi Life Research.
The core consumer price index (CPI), which excludes volatile fresh food prices but not other food products or oil prices, rose 1.9 percent in June from a year earlier, matching a consensus forecast.
It was the biggest annual inflation rate since a 2.0 percent rise in January 1998 and marked a jump from the 1.5 percent annual increase logged in May. But the gain was almost entirely due to a 13.7 percent increase in energy costs and a 3.5 percent rise in the price of processed food, or food other than fresh produce, as soaring commodity costs pushed up prices for goods ranging from spaghetti and cheese to biscuits.
"It seems like the global wave of high oil, raw material, food prices is finally hitting Japan," Prime Minister Yasuo Fukuda told reporters, adding that the government would continue to watch the economic impact of rising prices carefully.
The so-called "core-core" CPI, which excludes both fresh food and energy prices, rose only 0.1 percent in June from a year earlier, signalling that many companies were still struggling to pass on rising costs to consumers. That spells trouble for Japan's economy with its longest postwar expansion under threat as a global economic slowdown hurt exports, which marked an annual fall in June for the first time in nearly five years.
"As the economy currently depends on overseas economies, it is hard for the Bank of Japan to raise rates just because annual inflation temporarily rises to around 2 percent," said Takeshi Minami, chief economist at Norinchukin Research Institute. Swap contracts are pricing in about a 20 percent chance of a rate rise by the end of this year and a 50 percent possibility by March next year.
The BoJ has left rates steady since February last year, when it hiked them to 0.5 percent, and scrapped its tightening bias in April this year on economic uncertainties at home and abroad. Core CPI for the Tokyo area, out a month before the nation-wide figures, matched a median market forecast for a 1.6 annual increase in July as electricity and gas bills rose on soaring energy costs.
Rising raw material costs have hurt corporate profits and consumer sentiment, prompting economists to forecast a slight contraction in Japan's April-June economic growth. The government has repeatedly said Japan is not in a recession but has conceded that the economy may be approaching a turning point after a slow expansion that began back in 2002.
Economics Minister Hiroko Ota said she was concerned that rising prices could hurt consumer spending. "The two main risks to the economy are a slowdown in the US economy and the impact of surging raw material costs," she told a news conference after inflation data.
That view is shared by many BoJ officials, who fret that steady rises in raw material costs would deepen troubles for the corporate sector and reduce consumers' already weak spending. BoJ Governor Masaaki Shirakawa said last week he was putting equal focus on inflation and downside economic risks, but added that he saw no knock-on effect yet from rising commodity prices with wages barely on the rise.