Japan's Demand-Led Inflation Slows, Clouds BOJ Rate Hike Path

 People visit Ameya-Yokocho shopping street in the Ueno area of Tokyo on June 19, 2024. (AFP)
People visit Ameya-Yokocho shopping street in the Ueno area of Tokyo on June 19, 2024. (AFP)
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Japan's Demand-Led Inflation Slows, Clouds BOJ Rate Hike Path

 People visit Ameya-Yokocho shopping street in the Ueno area of Tokyo on June 19, 2024. (AFP)
People visit Ameya-Yokocho shopping street in the Ueno area of Tokyo on June 19, 2024. (AFP)

Japan's core inflation accelerated in May due to energy levies but an index that strips away the effect of fuel slowed for the ninth straight month, data showed on Friday, complicating the central bank's decision on how soon to raise interest rates.

The slowdown in so-called "core core" inflation, which is closely watched by the Bank of Japan as a key gauge of demand-driven price moves, casts doubt on the bank's view that rising wages will underpin consumption and keep inflation on track to durably hit its 2% target.

The core consumer price index (CPI), which excludes volatile fresh food, rose 2.5% in May from a year earlier, government data showed, accelerating from the previous month's 2.2% gain due largely to a hike in the renewable energy levy. It was roughly in line with a median market forecast for a 2.6% gain.

But inflation as measured by an index stripping away both fresh food and fuel slowed to 2.1% in May from 2.4% in April, marking the lowest year-on-year increase since September 2022.

Private-sector service inflation slowed to 2.2% in May from 2.4% in the previous month, suggesting companies remained cautious about passing on labor costs.

"The Bank of Japan has been arguing that the strong pay hikes agreed upon in this year's spring wage negotiations will eventually provide a boost to services inflation, but so far there's little evidence of that happening," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

A renewed rise in crude oil prices and the boost to import costs from a weak yen muddle the outlook for inflation.

Analysts expect core CPI to accelerate near 3% later this month due to rising raw material costs. But such pressure could hurt consumption and discourage firms from hiking prices, hampering the BOJ's efforts to keep underlying, demand-driven inflation durably around its 2% target.

"Real wage growth remains weak in Japan and there's no data confirming that demand-driven inflation is accelerating," said Takeshi Minami, chief economist at Norinchukin Research.

"The BOJ probably won't raise rates again at least until October-December this year," he said.

The BOJ exited negative rates and bond yield control in March in a landmark shift away from a decade-long, radical stimulus program.

With inflation exceeding its 2% target for two years, it has also dropped hints that it will raise short-term rates to levels that neither cool nor overheat the economy - seen by analysts as somewhere between 1-2%.

Many economists expect the BOJ to raise interest rates to 0.25% this year, though they are divided on whether it will come in July or later in the year.

BOJ Governor Kazuo Ueda has said the central bank will raise rates if it becomes more convinced that inflation will durably hit 2% backed by robust domestic demand and higher wages.

Recent weak signs in consumption remain a concern. Japan's economy contracted in the first quarter due in part to a 0.7% drop in consumption as rising living costs discourage households from boosting spending.



Moody’s Upgrades Türkiye’s Ratings to B1 on Tight Monetary Policy

A street vendor waits for customers at an underground passage in Istanbul, Türkiye, July 11, 2024. (Reuters)
A street vendor waits for customers at an underground passage in Istanbul, Türkiye, July 11, 2024. (Reuters)
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Moody’s Upgrades Türkiye’s Ratings to B1 on Tight Monetary Policy

A street vendor waits for customers at an underground passage in Istanbul, Türkiye, July 11, 2024. (Reuters)
A street vendor waits for customers at an underground passage in Istanbul, Türkiye, July 11, 2024. (Reuters)

Ratings agency Moody's upgraded Türkiye’s ratings to "B1" from "B3" on Friday, citing improvements in governance and a tighter stance on monetary policy.

Backed by President Recep Tayyip Erdogan and spear-headed by Finance Minister Mehmet Simsek, Türkiye has been implementing a tight monetary and fiscal policy since last year to tackle soaring inflation. Annual inflation dipped to below 72% last month from above 75% in May, which is seen as the peak.

Türkiye’s central bank has raised its main rate to 50% from 8.5% since Simsek was appointed last year.

The country's central bank has recently said it will maintain its tight monetary policy stance until a permanent decline in inflation is achieved. In June, the central bank reiterated that disinflation would take hold in the second half of the year.

Last month, the international crime watchdog, Financial Action Task Force (FATF), removed Türkiye from its "grey list" of countries that require special scrutiny, in a boost to the country's economic turnaround plan.

Moody's is the first credit ratings agency to announce new ratings for Türkiye following the FATF decision.

Lower current-account deficit and improvement in the central bank's financial position has materially reduced the country's external vulnerability, Moody's said.

"Earlier concerns over rising risks of a full-blown balance of payments crisis - which had triggered successive downgrades to the B3 rating level - have for now dissipated," the agency added in a statement.

The agency also maintained its "positive" outlook on Türkiye, expecting authorities to maintain its tight economic policy stance for longer.