Unfamiliar challenge: inflation

Jiwamol@nationgroup.com

The Nation

In March, consumer prices in Japan rose 0.1 per cent on year - the fastest pace in a decade - as companies passed on the higher costs of gasoline and food to protect profits.

This marked the first increase since 1998 and is a sign that Japan could be close to shaking off 10 years of deflation.

The headline core CPI rate, which includes fast-rising energy prices, leapt 1.2 per cent on year, the highest in 10 years and a better reflection of how consumers perceive price changes.

Bonds fell as traders increased bets that the Bank of Japan would later this year raise interest rates from 0.5 per cent to quell inflation.

"Core prices will continue to increase, spurred by crude oil and food," said Masaaki Kanno, now chief economist at JP Morgan Securities Japan. "The Bank of Japan will probably suggest it maintains the basic stance of normalising monetary policy and will raise interest rates eventually unless the external environment deteriorates."

Expectations that the bank would cut the key rate, the lowest among major economies, have evaporated in the past month.

Investors see a 66-per-cent chance of a rate increase by December compared with 38 per cent before today's report, according to JP Morgan Chase calculations. As recently as March 20, traders priced in a 71-per-cent likelihood of a cut.

The central bank will probably increase its projection for core price increases from 0.4 per cent in the outlook report on April 30, economists say.

However, higher inflation might not be good.

Economic and Fiscal Policy Minister Hiroko Ota said Japan's inflation "isn't at all a good thing" because it's being driven by higher energy prices rather than demand. The country is still struggling to stamp out deflation, she said last week.

Of the 1.2-per-cent rise in the headline CPI, 0.73 percentage points were due to energy and 0.41 points to food. In yen terms, oil prices are 50 per cent higher than a year ago. Economists have characterised Japan's rising prices as cost-push inflation.

So, there are two sides of the coin. Would you prefer to see heads or tails?