Japan's latest inflation report sends a clear signal: underlying price pressures remain strong, even if the headline numbers look calm.
The March 'core-core' CPI, which excludes volatile fresh food and energy prices, rose by 2.4%. This figure is what the Bank of Japan (BOJ) watches most closely to gauge the true, underlying inflation trend. It stands in contrast to the lower headline inflation of 1.5%, which was softened by factors like government energy subsidies. In short, the situation is 'sticky under the hood, softer on the surface'.
So, what's driving this persistence? First and foremost, it's robust wage growth. For the third consecutive year, the annual 'Shuntō' wage negotiations resulted in average pay hikes of over 5%. When people earn more, they tend to spend more, which naturally pushes up prices, especially for services.
Second, this wage pressure is clearly visible in other economic data. The Services Producer Price Index shows that businesses are charging more for their services, passing on higher labor costs. Additionally, the weak yen, trading near 160 to the U.S. dollar, makes imported goods more expensive. This adds to cost pressures for companies, which may eventually be passed on to consumers.
This brings us to the policy dilemma. The BOJ has already started raising its policy rate to around 0.75%, but this is still significantly lower than the 2.4% core-core inflation rate. This creates a negative real interest rate, meaning the cost of borrowing is lower than inflation. Such an environment encourages borrowing and spending, which can keep inflationary pressures alive.
Therefore, while the slight dip in the core-core figure might seem like a small victory, the broader narrative remains unchanged. The data reinforces the view that Japan's underlying inflation is persistent, supported by a strong wage-price cycle. This strengthens the case for the BOJ to consider another rate hike in the coming months to ensure inflation sustainably settles around its 2% target.
- Glossary
- Core-Core CPI: An inflation measure that excludes both fresh food and energy prices to provide a clearer view of underlying, long-term price trends.
- Shuntō: The Japanese term for the annual spring wage negotiations between labor unions and companies, which sets the tone for wage growth across the country.
- Real Interest Rate: The interest rate after accounting for inflation. It is calculated as the nominal interest rate minus the inflation rate. A negative real rate encourages spending over saving.