2023 Inflation in Japan Reaches 40-Year High, Pushing Central Bank to Take Action

In November, Japan's core inflation rate rose at the fastest pace in nearly 41 years, leading to speculation that the Bank of Japan might tighten monetary policy in 2023.

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After the central bank's surprise move to raise its cap on a key interest rate, market watchers are split over whether more is coming next year. But they agree that inflation will be a key factor in the decision.

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Core consumer prices rose at the fastest pace in nearly four decades in November, according to government data released Friday. The core consumer price index, which covers all prices except fresh food, rose 3.7% from a year earlier in November, the fastest pace since December 1981.This increase in prices is likely to continue in the near term as the economy continues to recover from the pandemic. There are other signs that Japan has broken out of its decades long rut of near-zero price changes. If so, that would give the Bank of Japan more room to consider fully unwinding the easing framework that Gov. Haruhiko Kuroda has built up after nearly a decade on the job.

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Mr. Kuroda's policies include negative short-term rates and a cap on the yield of the 10-year government bond. On Tuesday, the bank raised that cap to 0.5% from 0.25%, driving up interest rates across the board. By doing so, the BOJ hopes to spur inflation and economic growth. Daiwa Securities economist Mari Iwashita said the framework could be up for review as soon as next summer under a new BOJ governor. The current governor, Mr. Kuroda, is expected to step down in April after two more policy meetings.

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Ms. Iwashita said that a virtuous cycle is starting to work, with the price trend rising moderately.
She cautioned that the central bank would want to confirm first that wages were rising solidly in spring labor negotiations in Japan and that the U.S. economy wasn’t in deep trouble. The central bank would also want to see evidence that inflation was picking up in Japan before taking any action. The Federal Reserve and the European Central Bank have both raised interest rates aggressively this year. This has pushed the value of the US dollar up against the Japanese yen, and has put pressure on the Bank of Japan to raise rates in response.

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Japan's consumer prices excluding fresh food and energy prices rose 2.8% from a year earlier in November, well above the BOJ's 2% target. This suggests that inflation is not driven mainly by higher prices for imported oil and natural gas. This is a sign of growth in underlying inflation, which is good news for the Japanese economy.
Some policy makers believe that Japan is finally starting to change its long-standing deflationary mindset, which has made consumers hesitant to spend when prices rise and made it difficult for companies to adjust their prices accordingly. This change could help to boost the country's economy.

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Nissin Foods Holdings Co. announced last week that its frozen-food unit plans to raise prices on its frozen noodles by up to 20% in March 2023. The price increase is due to higher costs of raw materials and the weak yen. This follows a price increase in March of this year.
This month, CoCo Ichibanya, a chain serving Japanese-style curry, increased the price of its beef curry dish by 6.5%. It now costs the equivalent of $5.42, which is still a relative bargain by American restaurant standards.

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Some people are skeptical that Japan's inflation picture has really changed, including the central bank itself. The bank's policy board expects the core inflation measure to fall to 1.6% in the fiscal year starting April 2023 because the prices of oil and some other commodities have stopped rising.

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Mr. Kuroda denied that his policy shift on Tuesday signaled the start of a tightening binge or reflected any concern about inflation staying above his 2% target. He described the move as a way to improve the functioning of the bond market.
Mr. Kuroda said that Japan still needs more time to achieve sustainable inflation, accompanied by steady wage growth. He added that the country is making progress on this front, but there is still more work to be done.

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Sarah Tan, an economist at Moody's Analytics, said that inflation is likely to hit 4% in December, but that it will decline in 2023. This is partially because a recovery in the yen's value, triggered by Mr. Kuroda's move, will bring down the price of imported goods.

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Ms. Tan said that while American consumers have contributed to inflation with healthy post pandemic spending, this is not the case in Japan. In Japan, she said, "demand-driven price pressure remains preciously scarce." She added that a new Bank of Japan governor could tweak policy, but that it is unlikely to result in a fundamental shift.