Japan Consumer Prices Rise at Largest Rate in 31 Years... Will BOJ Finally Raise Interest Rates? (Comprehensive)

Core CPI in August rises 2.8% YoY
Largest increase since September 1991... 5th consecutive month in 2% range
BOJ to hold monetary policy meeting on 21st

Haruhiko Kuroda, Governor of the Bank of Japan.
Photo by Yonhap News

[Asia Economy Reporter Lee Ji-eun] Japan's consumer price index (CPI) inflation rate has reached its highest level in 31 years. Attention is focused on whether the Bank of Japan (BOJ), which has been hesitant to raise its benchmark interest rate to address the chronic low inflation, will revise its monetary policy direction this month.

On the 20th, Japan's Ministry of Internal Affairs and Communications announced that the core CPI for August, excluding volatile fresh food, was 102.5, marking a 2.8% increase compared to the same month last year. Excluding the impact of the consumption tax hike in October 2014 (2.6%), this is the largest increase in 30 years and 11 months since September 1991 (2.8%).

The CPI has risen for 12 consecutive months, maintaining an inflation rate in the 2% range for five months. The 2% target is the value set by the Bank of Japan to curb inflation.

Energy and food prices have driven the price increases. Energy prices rose 16.9% year-on-year, surpassing the previous month's increase of 16.2%. Electricity rates increased by 21.5%, and city gas charges surged by 26.4%. Gasoline prices rose by only 6.9% due to government subsidies. Food prices excluding fresh food rose 4.1%, exceeding the 3.7% increase in July.

The weak yen also contributed to the inflation. As of that day, the dollar-yen exchange rate was trading at 143.02 in the Tokyo foreign exchange market.

With Japan's consumer prices showing a continuous upward trend, interest is also focused on the BOJ's monetary policy direction. Despite tightening moves by central banks worldwide, including the U.S. Federal Reserve (Fed), Japan continues to maintain an accommodative monetary policy to stimulate the economy.

The BOJ is scheduled to hold a monetary policy meeting starting on the 21st to discuss whether to raise interest rates. Major foreign media predict that unlike other major countries, led by the Bank of England (BOE) and the Swiss National Bank, which are expected to raise rates, BOJ Governor Haruhiko Kuroda is likely to maintain the current monetary policy stance this time as well.

The problem is that Japan's insistence on negative interest rates has widened the interest rate gap between the U.S. and Japan, causing the yen's value to decline rapidly. Concerns are growing that the weak yen is having a negative impact on the Japanese economy.

When the yen's value approached the 145-yen level on the 14th, the BOJ conducted a "Rate Check," asking market participants about the exchange rate level. Rate Checks are conducted when verbal intervention is deemed insufficient to curb volatility in the foreign exchange market.

The massive amount of funds being injected to purchase government bonds is also a cause for concern. Bloomberg reported that as global bond sales pushed up government bond yields, the Bank of Japan purchased bonds worth 1.4 trillion yen.

Some attribute the BOJ's hesitation to raise interest rates to its massive holdings of government bonds.

Under its artificial yield curve control (YCC) policy, the BOJ has maintained a large-scale monetary easing policy by capping the yield on 10-year government bonds, a long-term interest rate indicator, at 0.25%. As a result, the BOJ has continuously purchased government bonds to keep rates low, now holding 50.4% of all Japanese government bonds. In this situation, raising the benchmark interest rate would cause bond valuation losses, resulting in significant damage.

On the other hand, some experts analyze that since the financial support policies initiated during COVID-19 are expected to end soon, there is a possibility of changes in the BOJ's guidelines.

Bloomberg explained, "The Bank of Japan is currently implementing part of its monetary policy in connection with the spread of COVID-19," adding, "The end of special financial support policies indicates the possibility of changes in monetary policy."

Naomi Muruguma, an investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Japan, said, "The key is what the Bank of Japan will link its monetary policy to instead of COVID-19," but predicted, "The bias toward accommodative policy will not change."

This content was produced with the assistance of AI translation services.