For the first time in 30 years, the price increase of services in Japan reached 2% in July. This was a long-awaited breakthrough for the central bank, which is holding off on putting out a plan for policy normalization until there is evidence of sustained inflation.
The internal affairs ministry stated on Friday that service inflation increased to 2% from 1.6% in June as a result of rising expenses for telephone, accommodation, and entertainment. Service inflation had not exceeded 2% since 1993, barring the effects of a 1997 sales tax increase.
Nobuyasu Atago, chief economist at Ichiyoshi Securities Co., stated that the data "confirmed once more that prices are stickier than the BOJ and markets are thinking."
For a quarter of a century, the Bank of Japan has been trying to boost inflation. In the previous decade, when it set a sustained inflation target of 2%, it launched an exceptionally vigorous stimulus campaign.
"An external shock first sparked inflation, but it has since changed to inflation caused by internal reasons. This is what a rise in service inflation tells us, according to Mizuho Securities Co. chief economist Shunsuke Kobayashi. Whatever they publicly state, I believe the BOJ is preparing to be prepared to move toward normalization whenever necessary.
Japanese families have been reducing their discretionary spending for years as a result of stagnant wage growth, which has left households there behind their peers in terms of total inflation. After businesses agreed to historically high pay rises in this year's annual wage discussions, Friday's figures suggested the dynamic may finally be changing. Increased inbound tourism and unmet leisure demand are further factors driving increasing service prices.
The benchmark price index for the BOJ decreased to 3.1% from 3.3%, but economists are noticing indications that inflation is still sticky as it spreads far and deeply. Since April of last year, the aim for price rise has been exceeded. While it waits to see if wage growth will continue at a rate strong enough to encourage consumption, the BOJ has maintained its easing program.