Japan’s core inflation perks up, moderating price trend muddles BOJ outlook

By Thomson Reuters Mar 21, 2024 | 6:56 PM

By Takahiko Wada and Leika Kihara

TOKYO (Reuters) – Japan’s core inflation accelerated in February but an index gauging the broader price trend slowed sharply, data showed, highlighting uncertainty on how soon the central bank will hike interest rates again.

While rising wages and the boost to import costs from renewed yen declines could underpin price growth, some analysts expect inflation to slow below the Bank of Japan’s 2% target later this year as domestic demand remains tepid.

Markets are seeking clues on when the BOJ will next raise rates after its decision on Tuesday to exit its radical stimulus programme, making a historic shift away from a focus on reflating growth through aggressive monetary easing.

The core consumer price index (CPI), which excludes fresh foods but includes energy items, rose 2.8% in February from a year earlier, government data showed, matching median market forecasts.

It accelerated from a 2.0% gain in January due largely to the base effect from the launch of energy subsidies last year.

But inflation as measured by an index stripping away the effect of fuel, closely watched by the BOJ as an indicator of broader price trends, moderated to 3.2% in February from 3.5% in January, marking the slowest annual pace since January 2023.

“There are no signs of the overshooting that BoJ Governor (Kazuo) Ueda has said would be needed for the Bank to tighten monetary policy any further,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

“Indeed, we still expect inflation to fall below the Bank’s target by the end of the year.”

Core consumer inflation has exceeded the BOJ’s 2% target since April 2022, initially driven by a wave of price hikes from firms that passed on rising raw material costs to households.

The central bank has described its decision to end negative rates on Tuesday as driven by signs that robust demand and prospects of higher wages were prodding firms to keep hiking prices not just for goods but services.

BOJ Governor Ueda said on Tuesday the central bank could hike rates again if inflation overshoots expectations or upside risks to the price outlook heighten significantly.

Japan’s economy expanded an annualised 0.4% in the final quarter of last year, narrowly averting a technical recession as robust capital expenditure offset weaknesses in consumption.

But the BOJ revised down its economic assessment on Tuesday and warned of soft signs in consumption and output, casting doubt on the strength of Japan’s recovery.

(Reporting by Leika Kihara and Takahiko Wada; Editing by Sam Holmes and Christopher Cushing)