Japan’s core inflation accelerated in February, but an index measuring the broader price trend slowed sharply. This discrepancy highlights uncertainty regarding when the central bank will hike interest rates again. While factors such as rising wages and import costs could support price growth, analysts predict that inflation may dip below the Bank of Japan’s 2% target later this year due to tepid domestic demand. The markets are eagerly awaiting clues on the timing of the BOJ’s next rate increase following its decision to exit the radical stimulus program.
The core consumer price index (CPI), excluding fresh foods but including energy items, rose by 2.8% in February compared to the previous year, matching market expectations. This acceleration from January’s 2.0% gain can be attributed to the base effect from last year’s energy subsidies. However, an index that removes fuel impacts, closely monitored by the BOJ, saw inflation moderate to 3.2% in February from 3.5% in January – the slowest annual pace since January 2023. This slowdown raises concerns about meeting the 2% target.
Marcel Thieliant from Capital Economics noted the absence of the overshooting required for the BOJ to tighten monetary policy further. Despite core consumer inflation surpassing the target since April 2022, predictions suggest that inflation could fall below the Bank’s goal by the end of the year. The initial surge in inflation was attributed to firms passing on rising costs to consumers, prompting the central bank to end negative rates on Tuesday in response to heightened demand and wage growth.
Japan’s economy grew by 0.4% in the final quarter of last year, avoiding a technical recession due to strong capital expenditure offsetting consumption weaknesses. However, the BOJ downgraded its economic assessment and pointed out soft spots in consumption and output. This raises doubts about the sustainability of Japan’s economic recovery and the potential impact on inflation.
Overall, Japan’s inflation acceleration presents a mixed picture with concerns about falling below the BOJ’s target and uncertainties surrounding future interest rate hikes. The nuances of core inflation trends and economic indicators highlight the challenges faced by policymakers in navigating Japan’s monetary landscape.