ING says Japan’s softer-than-expected April CPI, driven by government subsidies and a high food base, will not prevent a Bank of Japan rate hike in June, with pipeline prices pointing to a rebound. Core inflation, stripping out volatile fresh food costs, also came in below expectations and below the prior month’s level.
The driving forces behind the miss were not difficult to identify. Government energy subsidies pushed energy prices down 3.9 percent overall, with petrol prices falling 9.7 percent thanks to an official price cap, and utility fees dropping 1.5 percent. Education costs fell 6.1 percent, largely reflecting government-funded reductions in tuition and school activity fees. Rice prices, which had peaked at a year-on-year gain of over 100 percent last May, continued their descent, rising just 0.6 percent in April, though the base effect from that extraordinary spike will continue to influence the data throughout this year.
Beneath the headline, the picture is less benign. Goods prices rose 0.5 percent month-on-month on a seasonally adjusted basis, with ING noting that rising energy costs are feeding into broader goods inflation even as government programmes push service prices lower. Producer and import prices have risen meaningfully over the past two months, a pipeline dynamic that analysts expect to show up in consumer prices in the months ahead.
It is that pipeline pressure, combined with the BOJ’s stated practice of assessing inflation after stripping out institutional distortions such as subsidies, that underpins ING’s June hike call. The central bank’s own forecasts had anticipated an inflation pickup in the second quarter, and the April data are seen as broadly consistent with that trajectory rather than a departure from it.
The political arithmetic within the BOJ’s board has also shifted. With first-quarter GDP coming in stronger than expected and April export data holding firm despite the pressures from the Iran-related energy shock, ING argues that the economic resilience needed to justify a further tightening step is clearly present.
Bank of Japan Governor Ueda
—
A June BOJ rate hike remains the base case for ING despite the softer April print, and if that consensus view holds across the market, yen support should remain intact on the crosses. The more immediate signal is in pipeline prices: meaningful gains in producer and import prices over the past two months suggest consumer inflation will re-accelerate in coming months, which could bring forward expectations of further tightening beyond June
