Gap between headline and underlying inflation makes it difficult for BOJ to proceed with rate hikes

Reuters reports that obscure inflation readings raise concerns among Bank of Japan (BOJ) officials. Policy doves argue this situation points to weak consumer demand in the country. 

The regulator’s recalibrated measures suggest that Japan’s underlying inflation, focusing on the strength of domestic demand and wages, remains below the target of 2%. This comes in stark contrast to headline price growth that is above that level at multi-year highs.

Additionally, according to BOJ estimates, medium- and long-term inflation expectations are in the range of 1.5% to 2%.

These trends, coupled with concerns about the impact of US tariffs on Japan’s economy, explain the pause in rate hikes by the central bank after it raised borrowing costs to 0.5% in January, Reuters notes.

The Bank of Japan expects the gap between underlying and headline inflation to narrow if food prices rise moderately and domestic demand picks up, driven by wage raises. BOJ officials claim to proceed with rate hikes once they are confident underlying inflation will reach 2%.