Japan's consumer inflation hits fresh 40-year high, eyes on BOJ policy

Japan's core consumer inflation hit a fresh four-decade high as companies continued to pass on rising costs to households, data showed, a sign price hikes were broadening and could keep the central bank under pressure to whittle down massive stimulus.

Months before Tuesday's surprise tweak to its yield control policy, Bank of Japan (BOJ) policymakers had discussed the potential market impact of a future exit from ultra-low interest rates, minutes of their October meeting showed on Friday.

While many retailers plan further hikes for food products next year, the outlook for inflation and the timing of any further BOJ policy tweaks are muddled by the risk of global recession and uncertainty over the pace of wage hikes, analysts say.

"The hurdle for policy normalisation isn't low. The global economy may worsen in the first half of next year, making it hard for the BOJ to take steps that can be interpreted as monetary tightening," said Takeshi Minami, chief economist at Norinchukin Research Institute.

Japan's core consumer price index (CPI), which excludes volatile fresh food but includes energy costs, rose 3.7 per cent in November from a year earlier, data showed on Friday, matching market forecasts and perking up from a 3.6 per cent gain in October.

It was the biggest rise since a 4.0 per cent jump seen in December 1981, when inflation was still high from the impact of the 1979 oil shock and a booming economy.

Aside from utility bills, prices rose for a broad range of goods from fried chicken, smartphones to air conditioners, in a sign of mounting inflationary pressure, the data showed.

Many analysts expect core consumer inflation to slow back near the BOJ's 2 per cent target next year, as the base effect of past fuel price spikes dissipates and the impact of government subsidies to curb electricity prices take effect from February.

But an index stripping away such one-off factors may remain elevated and keep pressure on the BOJ to remain vigilant to the chance of a demand-driven rise in inflation.

The so-called "core-core" index, which excludes both fresh food and energy prices, rose 2.8 per cent in November from a year earlier, accelerating from a 2.5 per cent increase in October.

The rise in the core-core index, which the BOJ closely watches as a gauge of demand-driven inflation, highlights how inflationary pressure is building in once deflation-prone Japan and could persist well into next year.

Already, companies expect to hike prices for 7,152 food products in the first four months of 2023, more than double the number of the same period this year, research firm Teikoku Data Bank said in a report.

"We'll likely see a rush in price hikes next year that could be more intense than this year," as companies face rising labour and distribution costs, Teikoku Data Bank said.

The BOJ stunned markets on Tuesday by tweaking its yield control and allowing long-term interest rates to rise more, a move market players see as a prelude to a further withdrawal of its massive stimulus programme.

BOJ Governor Haruhiko Kuroda, who will see his term end in April, has said the bank had no intention to roll back stimulus as inflation was set to slow below 2 per cent next year.

But the October minutes showed how many of his fellow board members are shifting their attention to the risk of an inflation overshoot and prospects of a stimulus withdrawal.

"Given structural changes such as a shift away from globalisation, past experiences in Japan may not necessarily apply. We can't rule out the chance of a big overshoot in inflation," one member was quoted as saying in the October minutes.

The CPI data will likely be among key factors the BOJ will scrutinise when it produces fresh quarterly inflation forecasts at a two-day policy meeting ending on Jan 18.

Many analysts expect the BOJ to revise up its present forecast, made in October, for core consumer inflation to slow to 1.6 per cent next fiscal year after hitting 2.9 per cent in the current fiscal year ending in March 2023.

Japan's economy unexpectedly shrank an annualised 0.8 per cent in the third quarter as global recession risks and higher import costs weighed on consumption and businesses.

While analysts expect growth to have picked up in the current quarter, there is uncertainty on whether wages would rise enough to compensate households for the increased cost of living and underpin consumption.