Tokyo inflation cools more than expected, weakening yen

[TOKYO] Tokyo’s inflation cooled more than expected as pressures from food and energy prices faded, triggering yen weakness on bets the Bank of Japan (BOJ) may delay the timing of its next interest rate hike.

Consumer prices excluding fresh food in the capital rose 2.3 per cent in December from a year earlier, slowing sharply from 2.8 per cent in the previous month, according to the Ministry of Internal Affairs and Communications on Friday (Dec 26). The deceleration was the first time since August, and reflected impacts from the end of energy subsidies last year. Economists had expected the reading to slow to 2.5 per cent.

The yen weakened to as much as 156.49 per US dollar after the release, after trading around 155.80 before the data came out. The overall inflation gauge also slowed sharply to 2 from 2.7 per cent in the previous year, while a deeper measure that strips out energy decelerated to 2.6 per cent. Tokyo’s data serve as a leading indicator for nationwide inflation trends.

Friday’s release comes as markets scrutinise Japan’s price trajectory to gauge the timing of the next policy move. Last week, the BOJ’s board voted unanimously to lift the policy rate to 0.75 per cent, the highest level since 1995. Governor Kazuo Ueda said at the post-decision briefing that further tightening would follow if the price outlook materialises, while refraining from specifying the pace or terminal rate level.

“The result was a bit weak. Price growth is slowing across goods, services and food,” said Koya Miyamae, senior economist at SMBC Nikko Securities. “Some sellers may have begun cutting prices after they went up a lot, especially for food. With demand stagnant, stores may have started running sales.”

Although the headline figure slowed sharply, it remained above the BOJ’s 2 per cent target, keeping the central bank on track for further policy tightening. The outcome also broadly aligns with the BOJ’s baseline view that price pressures will gradually ease. In its latest policy statement, the bank said inflation is expected to meet the bank’s target in the latter half of its projection period through fiscal year 2027.

Economists surveyed by Bloomberg expect the BOJ to raise rates roughly every six months, with the terminal rate seen at around 1.25 per cent. That means analysts expect roughly two more hikes from the central bank during this cycle.

Despite Ueda signalling that more rate hikes are likely along with a narrowing interest rate gap with the US, the yen has remained weak. The currency has been hovering near its softest level against the US dollar since January, potentially pushing up import costs that feed into domestic prices. The recent slide prompted Japanese officials to issue strong warnings that they stand ready to step into foreign exchange markets if needed.

The deceleration was partly driven by fading food inflation, and the trend will likely continue going forward. So far, food and beverage companies have indicated they plan to lift prices on 1,050 products next year, according to a recent report by Teikoku Databank. At the same juncture a year ago, the firms projected increases for roughly 4,400 items in 2025, the report said.

SEE ALSO

Japan plans US$189 billion new debt issuance in next year’s Budget, draft shows

Japan’s core November inflation holds steady at 3%: official data

Japan PM says country must pursue proactive spending for growth

Japan’s exports increase led by jump in demand in US, EU

More

Inflation dynamics are also a key concern for Prime Minister Sanae Takaichi, who unveiled a series of price relief measures as part of her economic package last month. Her 2.9 trillion yen of measures specifically targeting inflation include petrol tax cuts and subsidies for utility bills starting in January.

Whether those steps can make a real difference for households hit by higher living costs will be critical for Takaichi’s political standing. So far, her administration’s approval ratings remain elevated at above 70 per cent in recent local media polls, with roughly 40 per cent backing her economic policies.

Beyond inflation, both the BOJ and the government are closely monitoring whether the nation’s economy can rebound from its summer contraction as they mull policy.

In other releases on Friday, industrial production fell 2.6 per cent in November from the previous month, led by electronic machinery and cars, the Ministry of Economy, Trade and Industry reported. That compared with a consensus forecast for a 2 per cent decline. Output decreased 2.1 per cent from a year earlier.

Retail sales rose 0.6 per cent in November compared to the previous month, coming in slightly above expectations. The figures include spending by foreign visitors, meaning recent travel advisories issued by China could weigh on the data going ahead.

Separately, the Labor Ministry reported continued tightness in the job market on Friday. The unemployment rate stood unchanged at 2.6 per cent, while the jobs to applicant ratio remained at 1.18 in November, indicating 118 openings for every 100 job seekers.

A tight labour market is likely to sustain pressure on companies to lift wages, a development the BOJ and the government view as essential for maintaining growth.

“The bank has only just raised rates, and it will take until around the middle of the year to see the outcome of wage talks,” said Miyamae, adding that an early rate hike looks unlikely. “If in June or July underlying inflation looks reasonably firm, then a rate hike could come under consideration.” BLOOMBERG