Japan: Inflation Probably Peaked In August

The development in inflation in August was broadly in line with expectations. CPI inflation in August declined to 2.1% y/y (consensus: 2.1% y/y) from 2.3% y/y in July. The decline in inflation was mostly due to lower prices for fresh food as CPI excluding fresh food was unchanged at 2.4% y/y (consensus: 2.4% y/y). Core inflation remains muted. CPI excluding food & energy declined to 0.0% y/y (consensus: 0.2% y/y). Hence, based on the nationwide figures, there are still no signs of second-round effects on inflation from higher energy and food prices.

With retail prices on gasoline coming down we think inflation probably peaked in August. However, the preliminary September figures for the Tokyo area this morning cast some doubt on this expectation. These figures are usually a good indicator for the nationwide figures. In the Tokyo area CPI in September increased 1.4% y/y after increasing 1.3% y/y in August. More troubling, CPI excluding food & energy accelerated markedly to 0.5% y/y from 0.2% y/y.

Outlook: While there still may be some doubt about whether inflation peaked in August, it will most likely peak in Q3 and decline significantly in Q4 on the back of lower gasoline prices and some stabilisation in food prices. A decline in inflation should gradually start to boost private consumption. With core inflation still very muted, overall inflation is not a major issue in Japan and is not a major constraint on monetary policy. We still expect BoJ to be on hold for the next year and the next move eventually to be up. This scenario is currently priced very closely by the market with the 12M O/N forward rate currently trading at 0.54%

Danske Bank
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