Headline inflation in Japan surged to 3.3% y/y in June 2023, surpassing the US for the first time since October 2015. This development signals that Japan is narrowing the gap with other major economies like the eurozone and the UK and can no longer be considered a safe haven from inflation. While the June figure is lower than the peak seen 42 years ago in January, it still represents a significantly high rate for an economy like Japan, which has been traditionally oriented towards low inflation and was grappling with deflation as recently as August 2021.

The current situation poses a dilemma for the Bank of Japan (BoJ), which is one of the few major central banks maintaining a negative interest rate of -0.1%. The BoJ has been striving for nearly a decade to overcome deflation and achieve a sustainable 2% inflation rate. However, the persistent and substantial price increases could prove challenging to manage without monetary policy intervention. Additionally, the BoJ has committed to a policy of fostering sustained inflation alongside corresponding wage growth, but private sector wages have been rising more moderately than prices. On average, seasonally adjusted, they only increased by 1.7% y/y during the January-April period.

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