Japan’s CPI inflation jumps to highest in eight years, but BoJ still likely to leave ultra-accommodative policy stance unchanged
Japanese CPI inflation rose ahead of expectations in August, with the headline rate jumping 0.4ppt to 3.0%Y/Y, up 2.5ppts since the start of the year and the highest since September 2014. When excluding the impact of past consumption tax hikes, inflation was the highest for 31 years. When excluding fresh food, the BoJ’s forecast measure of core CPI also rose 0.4ppt, to 2.8%Y/Y. Meanwhile, the BoJ’s preferred core measure that excludes fresh foods and energy similarly increased 0.4ppt to 1.6%Y/Y, leaving the 2% target within striking distance. And when excluding all food and energy, the internationally comparable gauge of core CPI also jumped 0.3ppt to 0.7%Y/Y, the highest since 2015, albeit still well below equivalent readings in the US (6.3%), euro area (4.3%) and UK (6.3%).

Within the detail, the upwards shift in inflation last month in part reflected base effects associated with past declines in mobile phone charges, which were down ‘just’ 14.4%Y/Y in August compared with a drop of 44.8%Y/Y a year ago, and therefore accounted for half of the 0.4ppt increase in headline inflation. Hotel charges also provided a boost. And services inflation (0.2%Y/Y) posted the first positive reading since 2019. Meanwhile, reflecting higher prices of household durable goods, likely in part due to the weaker yen, non-energy industrial goods inflation was up around ½%Y/Y too. But while gasoline prices continued to ease back to a 17-month low, energy inflation (up 0.7ppt to 16.9%Y/Y) was lifted by higher electricity prices to account for roughly 40% of total inflation. Food inflation (4.7%Y/Y) also accounted for another 40%, illustrating that the majority of Japan’s inflation still largely reflects cost-push pressures related to global events.

As such, while the Fed looks set to push on with further aggressive tightening at its FOMC meeting on Wednesday, the BoE will raise rates for the 7th consecutive meeting this week and the SNB is expected to end its era of negative rates, the conclusion of the BoJ’s meeting on Thursday seems likely to see its ultra-accommodative policy stance, including yield curve control and a negative policy rate, left unchanged. The BoJ continues to point to Japan’s lagging economic recovery, with GDP yet to return above the pre-pandemic average in 2019, as well as still subdued underlying inflationary pressures associated not least with still relatively weak wage growth. And so, until updated economic projections are published in its Outlook Report next month, the BoJ might well even stick with its claim that it is still ready to ease policy further if required, which could further maintain downwards pressure on the exchange rate. Indeed, we would expect discussions on recent yen depreciation to be a key focus in Kuroda’s post-meeting press conference. Separately, while the BoJ looks set to confirm the conclusion of its Covid-related lending program at the end of this month, our colleagues in Tokyo also think that the Policy Board might consider new measures to support the financing of SMEs.

German producer prices smash records again in August due to energy shock but hints of cooling elsewhere
Price pressures on German businesses intensified markedly to a new record last month, illustrating the energy shock which even the Bundesbank now acknowledges seems bound to push the economy into marked recession by the end of the year. Overall, industrial producer prices rose 7.9%M/M and 45.8%Y/Y in August, with both the monthly and annual rates reaching series highs. The additional impetus last month came almost entirely from energy prices, which rose 20.4%M/M to be up about 35% since June and 139%Y/Y, with prices of electricity and natural gas at certain stages of the supply chain more than tripling from a year earlier as prices in wholesale natural gas and power markets spiked to record highs. It is something of a relief, therefore, that benchmark European wholesale natural gas prices continue to moderate in response to government actions, with the one–month forward Dutch TTF contract down close to €175.50/MWh, the lowest since late July, from a peak around €340 late last month.

In contrast to the pressures in electricity and markets, German industrial producer prices of mineral oil products fell for a second successive month to be up 37%Y/Y, the least since February. Moreover, excluding energy, the annual core rate of industrial PPI inflation slowed for a third successive month, down to 13.8%Y/Y. That was due to a fourth successive moderation in pressures in prices of intermediate goods, which rose just 0.1%M/M to be up 17.5%Y/Y, the least in eleven months, reflecting recent falls in prices of various commodities. Among other items, wood prices fell 13%Y/Y and prices for metal secondary raw materials fell 12.3%Y/Y. Capital goods inflation also slowed a touch, down 0.2ppt from July’s series high to 7.8%Y/Y. However, while their monthly rates of increase were well down from recent highs, producer price inflation of consumer goods remained elevated on an annual basis, matching July’s series high of 10.9%Y/Y for durables and rising to a new series high of 16.9%Y/Y for non-durables on higher food prices.

Looking ahead, the pressures in energy markets will be reflected in this morning’s euro area balance of payments data from the ECB. Given the record trade deficit recorded in July, which was due to weakness in exports as well as the sharp increase in fuel imports, the euro area’s external current account balance looks set to slip back into deficit from the surplus of €4.2bn in June.

Downtrend in US housing starts expected to pause in August
As the Fed’s two-day FOMC meeting gets underway, today’s US data focus is on the housing market. Having fallen almost 10%M/M in July, and cumulatively by more than 20% since May, housing starts are expected to post a very modest rebound in August. Our colleagues in Daiwa America note that single-family starts could stabilize after builders cut activity in the previous five months amid slowing demand for new homes. They add that multi-family activity has been well maintained despite a decline in July, as preferences have shifted to cheaper units. Overall, they forecast a rise in total housing starts of 1.7%M/M to 1.47mn. Building permits, however, are expected to maintain their downtrend, likely falling to the lowest level in a little more than a year.