Tokyo CPI cools below Bank of Japan’s target for first time since 2024
The central bank has already said that inflation is likely to ease below its 2% target in the first half of this year
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[TOKYO] A Tokyo inflation gauge eased to the slowest pace in more than a year as Prime Minister Sanae Takaichi’s utility subsidies curbed household energy costs, posing a communication challenge for the Bank of Japan (BOJ) as it looks to proceed with interest rate hikes.
Consumer prices excluding fresh food rose 1.8 per cent in the capital from a year earlier in February, the smallest gain since October 2024, according to the Ministry of Internal Affairs on Friday (Feb 27). That was a touch stronger than the median economist forecast of 1.7 per cent. The Tokyo CPI report is a leading indicator for national price trends.
The price gauge was widely expected to weaken for a third straight month as the impact of government steps to lower utility bills starts to impact data. A measure that also strips out energy to reflect the underlying strength of the inflation trend increased 2.5 per cent, staying above the BOJ’s 2 per cent target.
Friday’s data add to evidence that Japan’s price growth has entered a cooler phase largely owing to Takaichi’s anti-inflation steps and slowing growth in food costs.
While the BOJ will look past temporary factors in making policy decisions, the slower gains may complicate governor Kazuo Ueda’s task of justifying any further rate hikes. That’s especially true after the prime minister signalled her support for easy monetary policy with her first nominations for the central bank’s board earlier this week.
The yen was a fraction stronger after the price data, trading around 155.90 to the US dollar, after the slightly stronger-than-expected reading.
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Energy prices dropped 9.2 per cent from a year earlier as the impact of the government’s three-month subsidy programme to lower electricity and gas bills took effect in January. The government estimates that the programme will save 7,300 yen (S$59.27) for an average household over the course of the quarter.
The BOJ has already said that inflation is likely to ease below its 2 per cent target in the first half of this year, mainly because of the utility subsidies and distortions caused by comparisons with a year ago, when food prices surged. Officials have emphasised that they are focusing on underlying inflation trends rather than temporary, one-off influences.
The elevated cost of food has become a critical subject in political debates after soaring living costs played a primary role in two major electoral setbacks for the ruling Liberal Democratic Party (LDP) before Takaichi took the helm in October. Japanese households now devote a record portion of their spending to food, limiting the scope for discretionary outlays.
Takaichi’s leadership appeal, along with her commitment to quelling inflation, enabled her to lead the LDP to its most decisive triumph in history earlier this month.
The prime minister surprised some BOJ watchers earlier this week by nominating two professors with reflationist backgrounds to become new board members later this year in an apparent sign of her desire to see easy monetary conditions continue.
Friday’s data alone are not likely to shake the BOJ’s resolve to raise its benchmark rate when its economic outlook is realised. With the yen’s lingering weakness, traders see a roughly 69 per cent chance of a rate hike by April as at Friday, according to pricing in the overnight swaps index.
The BOJ delivers its next policy decision on Mar 19.
In other releases on Friday, factory output rose a weaker-than-expected 2.2 per cent in January from the previous month, the Ministry of Economy, Trade and Industry reported. That compared with a consensus forecast for a 5.5 per cent gain. Output rose 2.3 per cent from a year earlier.
Retail sales gained 4.1 per cent in January compared with the previous month, coming in above expectations. BLOOMBERG
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