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Analysis – 'Temporary' disappears as BOJ mulls accelerating inflation

by Leika Kihara

TOKYO (Reuters) – Something was missing from the Bank of Japan’s statement on rising inflation: the word “temporary”.

No longer signals that strong price gains will be short-lived, the central bank may soon go further to say they will be faster than expected for the rest of the year, in part due to the yen sliding to 24 year low, said three sources familiar with its thinking.

The Bank of Japan (BOJ) still expects inflation to slow next year, but probably not as fast as previously expected,

This means the country’s ultra-easy monetary policy , keeping both short- and long-term interest rates near zero may not last as long as forecasters think, although sources say

a majority of

Economists expect monetary policy to remain unchanged until the end of next year.

But describing the internal BOJ debate, one of the sources said: “Companies are passing on rising costs to households at a faster rate than expected. If consumption holds up, inflation is likely to rise next year. It won’t slow down much.”

Consumer inflation expectations are also rising, with price increases clearly spreading to items not directly affected by fuel increases in deflationary countries

Until June, BOJ officials often described the potential uptick in inflation as “temporary” in speeches and internal policy discussions. But they stopped doing so in July at the policy meeting, according to the minutes and minutes of the meeting.

While the speech was public, few (if any) people noticed the adjustment.

“This is probably not the best language to describe what is going on in the global and domestic inflation landscape,” the second source said on the word “temporary.”

Last year other central banks, notably the US Federal Reserve, the European Central Bank and the Bank of England, also said the rise in inflation was only temporary. Unprepared, now they are raising rates far more than

price pressures

in the latest evidence of rising price pressures in Japan, excluding fresh food but including fuel costs Annual core consumer inflation hit a seven-and-a-half-year high of 2.4 percent in July, surpassing the Bank of Japan’s 2 percent target for the fourth straight month.

The Bank of Japan currently forecasts that interest rates will fall below 2% next year.

Nearly 80% of Japan’s listed food companies are or plan to raise prices this year, four times as many as last year, according to a survey by private research firm Teikoku Databank.

These rises affect more than 20, Food, an average increase of 14%. One-third of the growth plans came into effect in October, suggesting inflationary pressures could intensify later in the year.

Most BOJ policymakers now expect core consumer inflation to hit 3 percent in October, with some expecting upward pressure to continue into next year, sources said.

A consumer price index excluding fresh food and fuel costs – closely watched by the Bank of Japan as a key barometer of domestic demand – rose 1.2% in July from a year earlier, the fourth straight month to achieve annual growth.

Some BOJ officials see the possibility of inflation reaching 2 percent in the coming months, sources said.

They forecast that a stronger price outlook will lead the Bank of Japan to raise its inflation forecast when it next revises its quarterly forecast in October.

The key is whether wages will start to rise as the cost of living increases. Only if wages are growing faster will Japan experience the persistent demand-driven inflation rise that the BOJ is seeking to achieve.

Currency movements

The role of weakness The yen, which has lost nearly 20% year-to-date, is becoming the Bank of Japan focus of attention.

“Currency movement is one of the key factors” For the Bank of Japan, the impact on prices deserves special attention, suggesting rising inflationary pressures from a weaker yen, a third source said will be a key topic in the bank’s public communications in the coming months.

There are early signs that Japan is finally shaking off its stubborn deflationary mentality. A government survey showed that in August, more than 90% of households expected prices to rise in the next 12 months, with nearly % % Expected to grow by 5% or more.

But Japan’s growth prospects are also uncertain as the US, European and Chinese economies face headwinds.

“Cost-push pressures are intensifying at an unprecedented level, prompting firms to raise prices. Some profitable firms are also raising wages,” said a former BOJ board member Goushi Kataoka.

“The problem is that the global economy may enter a trough before this positive cycle gains momentum.”



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