Inflation in Japan’s capital re-accelerates in February

A shopper is reflected on a mirror glass as she checks food items at a supermarket in Tokyo, Japan Jan 20, 2023. REUTERS/Issei Kato

TOKYO — Core inflation in Japan’s capital re-accelerated in February above the central bank’s target as the effects of government fuel subsidies faded, data showed on Tuesday, a sign conditions for ending negative interest rates were falling into place.

But an index stripping away the effect of energy costs, seen as an indicator of the broader price trend, slowed, shifting the focus on whether Japan can see wage hikes strong enough to underpin consumption.

The data will be among factors the Bank of Japan (BOJ) will scrutinize ahead of its policy-setting meeting on March 18-19 in judging whether to phase out its massive stimulus program.

Core consumer price index up

Core consumer price index (CPI) in Tokyo, a leading indicator of nationwide figures, rose 2.5 percent in February from a year earlier, matching market forecasts, data showed on Tuesday.

The rise in the core index, which strips away the effect of volatile fresh food prices, followed a 1.8-percent rise in January.

READ: Japan gov’t considers calling end to deflation, Kyodo reports

A separate index that excludes the effect of both fresh food and fuel costs, rose 3.1 percent in February from a year earlier, slowing from a 3.3-percent gain in January. It was the slowest annual pace of increase since February 2023.

“The disinflation isn’t very broad-based as it mostly reflects a slowdown in processed food inflation,” Marcel Thieliant, head of Asia-Pacific at Capital Economics, said on the slowdown in the index excluding fresh food and energy.

“There’s nothing in today’s report that would prevent the Bank of Japan from ending negative interest rates next month.”

Bumper wage hikes

Japan unexpectedly slipped into a recession at the end of last year with the economy shrinking an annualized 0.4 percent in October-December on weak corporate and household spending.

But with inflation having exceeded 2 percent for well over a year and prospects for bumper wage hikes heightening, many market players expect the BOJ to end its negative interest rate policy by April.

READ: BOJ’s Ueda keeps wage hike hopes, quake dampens bet of Jan policy shift

BOJ Governor Kazuo Ueda said last week that it was too early to conclude that inflation was close to sustainably meeting the central bank’s 2 percent target. But he said the economy was recovering moderately and showing promising signs on the wage outlook.

In an effort to reflate growth and keep inflation stably at its 2 percent inflation target, the BOJ currently guides short-term rates at -0.1 percent and the 10-year government bond yield around 0 percent.