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.

Summary:
Source: ING analyst note on Japan April CPI

• Japan’s headline CPI slowed to 1.4% year-on-year in April, below the 1.6% market consensus and ING’s own 1.8% forecast, and down from 1.5% in March
• Core inflation excluding fresh food also came in below consensus and the prior month
• Government energy subsidies drove energy prices down 3.9%, with petrol prices falling 9.7% and utility fees dropping 1.5%; education prices fell 6.1% due to tuition fee reductions
• Rice prices rose 0.6% in April, continuing a descent from a peak of 101.7% last May, with the base effect expected to persist through the year
• Goods prices rose 0.5% month-on-month on a seasonally adjusted basis while services prices fell 0.5%, with energy costs seen feeding into broader goods inflation
• ING expects the BOJ to hike rates in June, noting that the central bank focuses on inflation excluding institutional factors and that core prices are projected to remain above 2%
• BOJ board members Koeda and Masu, who voted to hold rates in April, have since signalled openness to raising rates; stronger than expected first-quarter GDP and firm April export data are seen supporting the case for a hike

Japan’s inflation surprised to the downside in April, but analysts at ING are standing by their call for a Bank of Japan rate increase in June, arguing that government intervention rather than any genuine cooling in price pressure is responsible for the soft reading.

Headline consumer prices rose 1.4 percent year-on-year in April, falling short of both the 1.6 percent market consensus and ING’s own 1.8 percent forecast, and easing from 1.5 percent in March. 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. Members Koeda and Masu, who sided with the majority in voting to hold rates in April, have both since indicated that a rate increase warrants serious consideration. 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.