Japan inflation holds at decade high

Tokyo: Japanese core inflation stayed at 2.4 per cent in August, and there were signs that high energy and raw material costs were pushing up other prices at the fastest pace in a decade.

Still, many economists think inflation will eventually ease, as the latest upheaval in the US financial system is clouding Japan's growth outlook, which has been hurt by flagging exports.

The inflation figures did nothing to alter the view that the Bank of Japan will stand pat on interest rates for the time being as officials focus on downside risks to the economy rather than inflation.

"A slowdown in price hikes will give a sense of relief to consumers and companies, but the Bank of Japan is unlikely to raise interest rates until late next year, when financial turmoil settles and the global economy starts picking up," said Takeshi Minami, chief economist at Norinchukin Research Institute.

Index

The 2.4 per cent rise in the core consumer price index (CPI), which excludes fresh fruit, vegetables and seafood but includes oil products, matched a market forecast and was the same pace of growth as in July, which was the highest in a decade.

The rise in CPI has picked up pace since late last year on the back of a surge in oil and raw materials prices. But with oil prices heading south since July, many economists predict annual rises in CPI will peak in the coming months.

"I think core nationwide CPI will hit a peak in September as food prices will remain on a rise despite a slowdown in energy costs," said Susumu Kato, chief economist at Calyon.

"I had thought it could peak in July or August, but food prices are rising more than expected. Core CPI will probably peak at 2.5 per cent in September."

Excluding food and energy, prices were flat in August.

But some economists said inflation in the Tokyo area, seen as a leading indicator of nationwide trends as the figures are available a month earlier than nationwide ones, showed price hikes are starting to spread to a broader range of products.

Tokyo-area core CPI rose 1.7 per cent in September from the same month a year ago, above a market forecast for a 1.5 per cent increase. So-called "core-core" CPI, which excludes food and energy, was 0.5 per cent, the highest in a decade.

"In the past, price rises were limited mostly to food and oil but this month prices of furniture and clothes rose, which might suggest that rising costs are being passed onto more products, albeit very slowly," said Maiko Noguchi, a senior economist at Daiwa Securities SMBC.

But the Bank of Japan has so far maintained that rises in food and energy prices have not been leading to broad-based inflation as wages remain stagnant.

"I have children, so the continuous food-price escalation is devastating for me," 35-year-old housewife Sayoko Nakayama said.

Pressure

The government is under pressure to implement steps to ease public frustration with rising prices, but a supplementary budget to fund the steps faces a rough ride in parliament, whose upper house is controlled by opposition parties.

Japan's trade balance fell into deficit in August as exports to the United States posted their sharpest fall ever from the same month a year earlier, boding ill for an export-reliant economy.