Japan core inflation slows for second month, takes pressure off BOJ
A woman looks at items at a shop in Tokyo, Japan, March 24, 2023. REUTERS/Androniki Christodoulou/File photo
TOKYO —Japan‘s core inflation stayed above the central bank’s 2-percent target in December but slowed for a second straight month, data showed on Friday, reinforcing expectations it will be in no hurry to phase out its massive monetary stimulus.
The data, which matched median market forecasts, highlights receding inflationary pressure from raw material imports and heightens the chance the Bank of Japan will maintain ultra-low interest rates at next week’s meeting.
But steady rises in services prices and growing prospects of solid wage hikes will likely keep alive market expectations the central bank will pull short-term interest rates out of negative territory around April, some analysts say.
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“Japan‘s economy isn’t in very good shape with weak signs seen in consumption and capital expenditure. But that doesn’t seem to be affecting companies’ wage-hike momentum,” said former top BOJ economist Seisaku Kameda.
“We’ll likely see fairly strong pay rises in this year’s annual wage negotiations,” Kameda said, adding that he expects the BOJ to end negative rates in March or April.
The core consumer price index (CPI), which excludes fresh food but includes energy costs, in December rose 2.3 percent from a year earlier, marking the slowest pace of increase since June 2022. It followed a 2.5-percent rise in November.
The slowdown was largely due to a 11.6-percent fall in energy costs, which reflected the base effect of last year’s sharp rise and government subsidies to curb gasoline and utility bills.
While food prices continued to rise, the pace of increase moderated, in a sign of waning cost-push pressure that had kept core inflation above the BOJ’s target since April 2022.
Food and energy prices
A Reuters poll showed that Tokyo core consumer inflation, closely watched as a leading indicator of nationwide trends, likely hit 1.9 percent in January, falling below the BOJ’s 2 percent target for the first time since May 2022.
The key from here is whether wage hikes accelerate enough to give households purchasing power, so that companies can continue price hikes and keep inflation durably at the BOJ’s 2 percent target.
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The “core core” index that strips away both fresh food and energy prices, closely watched by the BOJ as a better gauge of the broader price trend, in December rose 3.7 percent from a year earlier after a 3.8-percent gain in November.
Services prices rose 2.3 percent in December from a year earlier, the data showed, steady from the previous month, suggesting prospects of rising wages are prodding some firms to hike prices not just for goods, but also for services.
The outlook for services prices is key to the timing of the BOJ’s rate hike, as the central bank has stressed the need for cost-push inflation to be replaced by broader price rises driven by robust domestic demand and wage growth.
“Unlike during Japan‘s prolonged deflationary period, prices are rising for a range of services,” said Kameda, who is currently an economist at a think tank affiliated with Japan‘s Sompo Holdings insurance group.
“The BOJ is probably becoming more convinced that Japan will see a positive wage-inflation cycle this year, in which wages and services prices rise in tandem,” he added.
