A survey conducted by the central bank on Friday, October 10, raised a major concern that the majority of Japanese households are bracing for higher prices in the year ahead.
Additionally, a separate data underlines persistent wholesale inflation, escalating the policy dilemma for the Bank of Japan (BOJ).
According to the BOJ's quarterly survey, 88.0% of households will experience rising prices, up from 85.1% in the previous poll in June.
This figure is the highest ever recorded in previous several quarters highlighting the intensifying inflation psychology among consumers.
Moving forward, around 84.8% of households foresee higher prices in five years, rising from 83.1% in the last survey.
The data highlights the growing challenge for policymakers as rising food and living costs erode public sentiment.
Chief economist at Totan Research, Izuru Kato, stated: “The steady rise in inflation expectations among households is a significant shift for Japan.”
“It shows that the era of deflationary mindset is truly receding,” he added.
Along with the results of the survey, another report on wholesale prices were released.
According to the report, the Japanese economy is under high pressure as the Corporate Goods Price Index (CGPI) rose 2.7% in September from a year earlier, matching the pace from August and exceeding market forecasts of a 2.5% increase.
The persistent wholesale inflation specially in food and beverages highlights a dilemma for the BOJ as prices increase around 4.7%.
While some sectors like agriculture showed negative trends which saw a 30.5% surge after a 41% jump in August, highlighting a new risk for the currency market.
Recently, the yen showed a multi-decade low trend following receding market bets for a near-term BOJ rate hike.
This negative trend is now causing a “negative cycle,” as described by Kato, where the BOJ’s cautious pace on rate hikes weakens the yen, which resultantly pushes up the cost of imported raw materials and living costs.
An economist at Daiwa Securities, Yutaro Suzuki, stated: “The BOJ is caught between supporting a fragile economic recovery and containing inflation and a falling yen.”
“We expect wholesale inflation to stay above 2% for the time being,” he added.
Another pressure is provided by the political situation. The new leader of the ruling party, Sanae Takaichi, who will become prime minister, has promised to curb the increasing living costs.
She is a reflationist who has also indicated that her first urgent task is to make up a package of relief money to households, which is consistent with the aim of the BOJ to have sustainable inflation driven by demand.
In January, the BOJ left its huge stimulus program last year and increased interest rates the first time since 2007.
Nevertheless, Governor Kazuo Ueda has been persistently advocating the go-slow policy, and it is important to note that future increase of rates should be based on robust domestic demand and wage increases, but not necessarily on cost-push arguments.
As households are now confident that prices will continue to rise, all actions taken by the central bank will be analyzed on whether they are signals that it is about to change its ultra-accommodative policy.