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(Bloomberg) — Inflation in Tokyo picked up in June on the back of higher energy prices and industrial output rose more than expected in May, likely keeping the Bank of Japan on track to consider an interest rate hike as early as July.
Consumer prices excluding fresh food rose 2.1% in the capital, accelerating from 1.9% in May, the ministry of internal affairs reported Friday. The reading exceeded the consensus estimate of 2%.
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Tokyo’s figures are leading indicators of the national data to be released in July.
In a separate set of data, Japan’s factory output rose 2.8% in May from April, beating the consensus call for 2% growth, as automakers including Daihatsu Motor Co. fully resumed production in the wake of a safety certification scandal that prompted suspensions of some factory lines.
The inflation figures were influenced in both directions by policy initiatives. The government’s move to phase out utility subsidies and introduce a renewable energy levy put a floor under prices, while an education support program available in the capital weighed. A gauge that excludes energy in addition to fresh food accelerated to 1.8%, reversing course after nine consecutive months of deceleration.
On balance, with the key gauge back above the BOJ’s 2% target and fresh signs of health in the manufacturing sector, Friday’s data will likely keep the BOJ on track toward normalizing monetary policy.
What Bloomberg Economics Says…
“Tokyo’s hot June CPI report isn’t the last data release before the Bank of Japan’s July meeting but it provides compelling evidence that the BOJ can proceed with a rate hike — our base case.”
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— by Taro Kimura
Click here to read the full report
At this month’s policy meeting, the BOJ left interest rates unchanged while flagging its intention to reduce its bond buying. Some in the market have questioned whether the bank could unveil two significant policy initiatives at the same meeting. Governor Kazuo Ueda has kept his options open, saying last week in the parliament that there’s a good chance the policy rate could be raised next month if data warrant such action.
One in three BOJ watchers foresees a rate hike in July, according to a Bloomberg survey earlier this week.
Natural gas prices flipped to a gain of 3.8% from a decline of 3.9% in the previous month, making the largest contribution to overall price growth.
Electricity prices rose 10.8% from a year earlier, a slower pace than in May even after the government began phasing-out a utility subsidy. The subsidies will be terminated completely at the end of the month.
The government also raised its renewable energy surcharges by about 2.5 times to ¥3.49 per kilowatt-hour starting in May.
Energy prices will continue to inject uncertainty into price development, with Prime Minister Fumio Kishida having recently announced the reinstatement of the utility subsidy from August through October in an apparent bid to revive his cabinet’s slumping popularity.
(Updates with economist’s comment)
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