Japan’s speedier inflation pace keeps BOJ’s next move in focus

JAPAN’S consumer inflation accelerated to the quickest pace in four months, an outcome that will keep markets focused on whether the Bank of Japan (BOJ) might follow its first interest rate hike since 2007 with an encore later this year.

Consumer prices excluding fresh food rose 2.8 per cent in February from a year ago, with the pace speeding up from 2 per cent in January, the Ministry of Internal Affairs said on Friday (Mar 22). The reading matched analysts’ estimates. As was the case with earlier data for the Tokyo area, much of the gains stemmed from base effects after utility subsidies weighed on prices in 2023.

Friday’s data marked the 23rd straight month consumer inflation excluding fresh food stayed at or above the BOJ’s price target. The figures come just days after the central bank called time on its massive stimulus programme aimed at stoking inflation, while leaving it unclear when it will move again.

A gauge of inflation that excludes fresh food and energy prices, a key indicator for underlying price trends, slowed to 3.2 per cent, a tad weaker than the 3.3 per cent consensus estimate. Services prices advanced by 2.2 per cent, the same pace as in the previous month. After the BOJ ended the negative rate on Tuesday, governor Kazuo Ueda pointed out he’s been monitoring services prices closely.

“Ueda referred to underlying inflation, suggesting that slow-moving service prices are important,” said Hiroshi Kawata, senior economist at Mizuho Research & Technologies. “Many firms tend to change service prices at the beginning of the fiscal year. It will be very important to see how much the April price index rises.”

Ueda said on Thursday the board voted earlier in the week to end the negative interest rate because there were concerns that waiting too long to make the move might greatly stoke inflationary pressure, potentially forcing the bank to undertake a rapid series of increases.

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The governor’s insistence that financial conditions will stay easy for now with no hint of another potential hike contributed to a weakening of the yen and a fall in Japanese government bond yields. Still, Ueda did say the BOJ would move if upward risks to prices strengthened.

Inflation in Japan has proven stickier than expected over the last year, prompting the central bank to upwardly revise its price growth projections in quarterly outlook reports on occasion.

The February gains came even though there have been pockets of weakness in consumer demand. Household spending fell for an 11th month in January, and the private consumption component of the fourth-quarter gross domestic product report was revised weaker.

Wage trends may change that trajectory this year. Japan’s biggest umbrella group of labour unions, Rengo, said last week that companies agreed in negotiations to give 5.3 per cent wage gains in the coming fiscal year, the biggest in more than 30 years and much higher than analysts forecast.

The results of the wage talks triggered a recalibration of views among some economists regarding the chances of inflation building momentum more rapidly than previously expected.

“It’s almost certain that real wages will turn positive by the end of 2024, and consumer confidence has already improved in anticipation,” Kawata said. “I believe that overall consumer spending will pick up considerably from April onward.”

In Friday’s report, the main drivers of price growth were much smaller declines in energy prices, with the decline in electricity narrowing to 2.5 per cent and the fall in natural gas slowing to 13.8 per cent. Cost increases for hotels and inns accelerated to 33 per cent.

Among the factors capping inflation was slower growth in processed food prices. Food companies have slowed the pace of price increases. Only about 700 food items are expected to see price hikes in March, compared with around 3,500 items a year ago, according to a report by Teikoku Databank.

The yen has continued to languish near its historic low versus the US dollar, keeping import costs high. That could put further upward pressure on overall inflation and prompt the central bank to take action again later this year.

“My base scenario is that the BOJ will raise interest rates again in October,” said Masamichi Adachi, economist at UBS Securities. “But it can happen earlier if the yen continues to be weak and causes the BOJ to cope with risks of another wave of undesirable cost-push inflation on higher import costs. It can happen in June or July.” BLOOMBERG