Japan's Inflation Accelerates Amid Rising Oil Costs and Ahead of BOJ Policy Decision

Japan's Inflation Gauge Accelerates for First Time in Five Months

Japan's core consumer prices excluding fresh food rose 1.8% from a year earlier in March, the Ministry of Internal Affairs and Communications announced on Friday. This marked the first acceleration in five months and was higher than the median economist estimate of 1.7%. The previous month's increase was 1.6%.

The measure excluding both fresh food and energy, a closely watched gauge of underlying inflation by the Bank of Japan, increased 2.4%. This remained above the central bank's 2% target. Overall inflation, including all items, accelerated to 1.5%.

The data come amid elevated oil costs and persistent yen weakness, which are driving up import prices. The Bank of Japan is leaning towards keeping its benchmark rate unchanged on Tuesday due to uncertainty related to the Middle East conflict. However, pricing in the overnight swaps markets shows that traders see a 67% chance of a hike in June.

Read also: Sun Pharma Advances $13 Billion Organon Acquisition Amid Global Expansion Strategy

Table: Comparison of Inflation Rates

The data may not have fully reflected the spike in energy prices. Gasoline prices climbed to a record ¥190.8 per liter in the middle of last month before the government revived subsidies to keep the price around ¥170. In Friday's report, gasoline prices fell 5.4% from a year earlier, slowing from a 14.9% retreat in the previous month.

Gasoline and kerosene were the driving factors, according to Yoshiki Shinke, senior executive economist at Daiichi Life Research Institute. However, their contribution is likely to ease from the next set of data as the government's subsidies started to cool gasoline prices from late last month.

Read also: Rupee Continues Downward Trend for Fifth Consecutive Day, Asian Currencies Also Decline

Bloomberg economics expects a 25-basis-point rate hike in June, citing the impact of higher petroleum prices driving the first wave of inflation from the Middle East oil supply squeeze. Crude oil prices are trading roughly 50% above levels seen before the US-Israeli war on Iran, a headache for Japan, which imports almost all of its oil, more than 90% of which usually comes through the Strait of Hormuz.

A separate gauge of service producer prices released by the BOJ reflected some of the impact from Middle East turbulence, rising 3.1% as costs for overseas cargo shipping surged 42% from a year earlier. Compared with the previous month, service producer prices rose 1.25%, the most in about 36 years excluding periods when there was a hike in the sales tax.

Economists warn it will become more difficult to keep a lid on inflation if crude prices remain elevated around these levels or increase further. The BOJ is considering raising its inflation outlook sharply in its quarterly outlook to be released with the policy statement next week. About three quarters of 51 economists see risks skewed to the upside in a Bloomberg survey.

Two months into the war, a raft of Japan's major food makers from Kikkoman Corp. to Nisshin Oillio Group have announced plans to raise prices, suggesting price pressures may broaden, even as the oil crisis also weighs on demand. In March, prices of processed food rose 5.2%, slowing from 5.7% in the previous month, weighing on the overall index. Rice prices, which surged a year ago, rose 6.8%.