Japan’s key gauge of inflation dropped to its lowest level since 2017, the latest indication of the difficulty faced by the Bank of Japan (BOJ) in generating price growth as speculation grows that it might add to its stimulus as early as next month.
Consumer prices excluding fresh food rose 0.5 percent last month from a year earlier, matching economists’ median estimate, the Japanese Ministry of Internal Affairs said.
A drop in energy prices was the biggest factor in the slowdown, it said.
Japan’s key inflation gauge has not risen above 1 percent in years and is expected to remain subdued in the next few months as education costs weigh on prices.
Bank of Japan Governor Haruhiko Kuroda on Thursday ordered a review to see if developments overseas have the potential to kill off momentum in Japanese prices toward the bank’s 2 percent target.
Compared with a month ago, Kuroda said he is now “more inclined” to go ahead with easing.
Energy prices, which have been contributing less to price gains since October last year, fell overall for the first time since January 2017.
Stripping out the effects of a drop in energy costs, last month’s inflation data might leave room for the central bank to argue that prices are actually moving in the right direction. Consumer prices excluding fresh food and energy rose 0.6 percent last month, exceeding economists’ forecasts for a 0.5 percent gain and above last year’s average pace of 0.4 percent.
“The BOJ will probably want to say price momentum is still upward, but they’ve already been pushed into a corner by price and economic data and will have to think about additional easing,” said Hiroshi Miyazaki, a senior economist at Mitsubishi UFJ Morgan Stanley in Tokyo.
A 2 percentage point sales tax hike that is to come into effect next month presents another risk that the bank will have to manage.
The previous increase to the tax in 2014 triggered a contraction of more than 7 percent the following quarter. Consumer spending has been supporting economic growth during an exports slump this year.
“Any pickup toward the 2 percent target is going to take a long time. We think the Bank of Japan will need to prepare for a longer-term effort to stoke consumer prices with a more flexible operational approach to its stimulus,” Bloomberg economist Yuki Masujima said.
Overall consumer prices rose 0.3 percent last month, matching economists’ median forecast. A 0.2 percent drop in hotel rates also weighed on inflation.
Separately, the central bank trimmed its bond purchases in a regular operation, a day after Kuroda said he would like to see a steeper yield curve.
Ten-year bond yields ticked up toward the bottom of the bank’s preferred range of plus or minus-0.2 percent.
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