Japan Witnesses Inflation amid Lax Monetary Policies

Data show that Japan may be seeing early signs of sticky inflation, with several measures of broad price trends reaching record highs in July, bolstering the case for a shift away from decades of ultra-easy monetary policy. The Bank of Japan (BOJ) publishes several measures of underlying inflation that examine the distribution of price changes based on the government's consumer price data.

The BOJ closely monitors the indices for clues on whether price increases are driven by one-time factors such as fuel, or if they are broadening enough to sustainably meet the BOJ's 2% inflation target.

The "trimmed mean" index, which excludes the upper and lower tails of the distribution, increased by a record 3.3% year on year in July, according to data released on Aug 22.

The "mode" index, which measures the most frequently seen rate of inflation in the distribution, rose a record 3.0% in July, exceeding the BOJ's 2% target for the sixth consecutive month.

In July, the proportion of items whose prices increased year on year reached a new high of 85.6%. After reaching a low of 46.7% in January 2021, the ratio continued to rise.

"The results show that not only did trend inflation accelerate in July, but that companies continued to pass on costs steadily," said Naoya Hasegawa, senior bond strategist at Okasan Securities. "The outcome may prompt the BOJ to become more optimistic about the price outlook."