Friday April 25, 04:27 AM
Headache for BoJ as Japan's inflation hits decade high
By Daniel Rook
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TOKYO (AFP) - Japan said Friday core inflation hit a fresh decade high of 1.2 percent in March on rising energy and food costs, creating a dilemma for the central bank with economic growth also slowing.
Rising fuel and food costs are threatening to hit corporate profits and consumer confidence, but analysts see little prospect of an interest rate rise any time soon to tame inflation because of the poor health of the economy.
Core (Berlin: LJ1.BE - news) inflation, which excludes volatile fresh food prices, picked up from 1.0 percent in February, the Ministry of Internal Affairs and Communications said, matching market expectations.
It (Frankfurt: A0MLX5 - news) was the sharpest increase in the core consumer price index (CPI (NYSE: CPY - news) ) since March 1998, when there was a sales tax hike. Prices have now risen for six straight months. Including fresh food, prices rose 1.2 percent.
Japan's central bank for years battled to end deflation with an unprecedented policy of virtually free credit.
But the return of inflation in Asia's largest economy has also been met with concern among policymakers because it is being driven by rising import costs.
Soaring prices of oil, raw materials and food are hurting companies and households, while wage and consumer spending growth remains sluggish.
"This kind of cost-push inflation is negative for the Japanese economy," said Mamoru Yamazaki, chief economist at RBS Securities in Tokyo.
Food prices increased 1.6 percent from a year ago, reflecting a global trend amid higher demand in emerging economies, the growing use of biofuels to combat climate change, and the effect of natural disasters and increased fuel costs.
Surging oil import costs also continued to have a major impact. But even excluding energy, core consumer prices rose 0.1 percent, turning positive for the first time in a decade, analysts noted.
Despite the pick-up in inflation, economists see little chance of an interest rate rise by the Bank of Japan in the foreseeable future given worries about the health of the domestic and global economies.
"I don't think the BoJ will consider a rate hike in the near future," said Yamazaki, who sees a chance of an increase next year if the economy recovers.
Some analysts even expect a rate cut by the BoJ amid worries that if the United States enters a recession, it could drag Japan down with it.
But with rates already at just 0.5 percent -- by far the lowest among the major economies -- Japan's central bank has appeared reluctant so far to lower official borrowing costs.
Japan's economy is on the mend after a slump stretching back over a decade, but sluggish consumer spending has raised concern that the country's export-led recovery could be snuffed out by a global economic slowdown.
Core consumer prices in Tokyo, a leading indicator of nationwide trends released a month earlier than the figures for the whole of Japan, rose 0.7 percent in April, the government reported.
Analysts noted that the increase came despite a drop in gasoline prices because of the expiry of a special fuel tax.
Investors appeared unfazed by the pick-up in inflation, with the benchmark Nikkei (news) -225 index soaring 2.0 percent by lunch on gains on Wall Street and a weaker yen which is positive for exporter earnings.
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