Japan’s consumer inflation reaches highest level in eight years in August

Japanese consumer core inflation rose to 2.8% in August. It thus reached its highest level in almost eight years.

Although core consumer inflation has exceeded the central bank’s target of 2% for five consecutive months, the Bank of Japan (BOJ) is unlikely to raise interest rates anytime soon as wage growth and consumption remain weak.

The data illustrate the conflicting role of the BOJ in trying to support the weak economy by keeping interest rates very low. This, in turn, has led to a depreciation of the yen, which has pushed up the cost of living for households.

The increase in the nationwide core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, was slightly above market estimates of 2.7% and 2.4% in July. This is the fastest increase since October 2014.

The so-called “core-core” index, which takes into account the cost of both raw materials and energy, rose 1.6% in August from a year earlier. The increase accelerated from 1.2% in July and the fastest rise since 2015.

The BOJ is closely monitoring the core index, as it provides an indication of how much inflationary pressure is coming from domestic demand.

Headline inflation reached 3.0% in August. This was the highest level since 1991 and underscores the pain consumers are experiencing with the rising cost of living.

The yen’s weakness is causing headaches for Japanese policymakers. This is because it is affecting retailers and consumers by pushing up the already rising prices of imported oil and food.

The world’s third-largest economy grew at an annual rate of 3.5% in the second quarter, faster than originally forecast. However, the recovery is slower than in other countries, as the recovery from COVID-19 infection, supply shortages and higher raw material costs are affecting consumption and productivity.

Meanwhile, inflation remains modest compared with other industrialized countries. The global downturn and high energy prices are clouding the outlook. The BOJ is committed to keeping interest rates very low and remains an outlier in the global tightening of monetary policy.

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