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Japan's inflation hits 8-year high in BOJ's test of dove policy

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  • September core CPI rises 3.0% YoY, matching forecasts
  • Core consumer inflation stays above BOJ target in 6 months
  • Data underscore growing inflationary pressure
  • BOJ maintains ultra-low interest rates in fragile economy

TOKYO, Oct 21 (Reuters) – Japan’s core consumer inflation rate rose to an eight-year high of 3.0% in September, challenging the central bank’s determination to maintain its ultra-easy policy stance as the yen continued to slide to 32-year lows. to raise costs

Inflation data underscores the dilemma faced by the Bank of Japan as it tries to support a weak economy by maintaining extremely low interest rates, resulting in an unwelcome fall in the yen.

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The increase in the nationwide core consumer price index (CPI), which excludes volatile fresh food but also includes fuel costs, met the median market forecast and followed a 2.8% increase in August. It stayed above the BOJ’s 2.0% target for the sixth month and was the fastest rate of increase since September 2014, according to data from Friday.

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Widening price pressures in Japan and the yen’s fall below 150, the key psychological barrier against the dollar, will keep market speculation alive that the Bank of Japan’s dove stance will be fine-tuned in the coming months.

“The current price increases are largely driven by rising import costs rather than strong demand. Governor Kuroda can maintain policy for the remainder of his term until April, but the key is whether the government can tolerate it,” said Takeshi Minami, the company’s chief economist. Norinchukin Research Institute.

Analysts say the data increases the chances of the BOJ revising its consumer inflation forecasts in new quarterly forecasts to be announced at next week’s policy meeting.

The yen’s decline was particularly painful for Japan, due to its heavy reliance on fuel and imports of most raw materials, forcing companies to raise prices for a wide variety of goods, from fried chicken to chocolate and bread.

The so-called “core-to-core” index, which eliminates both fresh food and energy costs, rose 1.8% year-on-year in September, gaining momentum from its 1.6% gain in August, and is the fastest annual since March 2015. recorded speed.

The increase in the core core index, which is closely followed by the BOJ as an important indicator of the underlying strength of inflation, towards the 2% target casts doubt on the central bank’s view that recent price increases will be temporary.

While Japan’s inflation was still modest compared to price increases seen in other major economies, the BOJ promised to keep interest rates super low and remained an outlier in a wave of global monetary policy tightening.

BOJ President Haruhiko Kuroda stressed the need to focus on supporting the economy until wage growth is high enough to offset the rising cost of living.

While Japan’s labor union lobby has pledged to seek wage hikes of about 5% at next year’s wage negotiations, analysts doubt that salaries will rise this much, amid fears that a global recession and soft domestic demand will cloud the outlook for many companies.

September CPI data showed that goods prices rose 5.6% year-on-year, while services prices rose only 0.2%.

“Consumer inflation is likely to slow in 2023. If so, any tweaks to the BOJ’s easy monetary policy will be negligible, even under a change in bank leadership next year,” said Yasunari Ueno, chief market economist at Mizuho Securities.

Governor Kuroda will see his second five-year term expire in April next year. The terms of the two deputy governors will expire in March.

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reporting by Leika Kihara and Takahiko Wada; additional reporting by Yoshifumi Takemoto; Editing by Sam Holmes and Shri Navaratnam

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