Tokyo inflation slows sharply as subsidies mask ongoing strength
INFLATION in Tokyo decelerated for the first time in more than a year, as ramped-up government subsidies masked a strengthening price trend that will keep scrutiny on the Bank of Japan’s (BOJ) policy path under the likely leadership of Kazuo Ueda.
Consumer prices excluding fresh food rose 3.3 per cent from a year earlier in the capital in February, slowing a full percentage point from the previous month and in line with economists’ forecast.
A slew of measures from Prime Minister Fumio Kishida’s administration is holding down an overall Tokyo inflation figure that would otherwise be around 4.5 per cent.
The Tokyo figure is a leading indicator of the national data, and the sharp deceleration suggests the country’s price growth may also have peaked in January as the full impact of subsidies kicked in.
The numbers will be closely analysed by a central bank that has spent much of the last year trying to convince both investors and the public that it makes sense to keep stimulating the economy even with inflation well above its 2 per cent target.
With Ueda almost certain to gain parliamentary approval to take the helm of the BOJ in April, speculation of looming change in the pipeline continues to simmer. The yield on 10-year government debt broke above the BOJ’s cap again on Friday (Mar 3), in a sign of the strain on the central bank’s stimulus programme amid a global bond selloff.
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“The results show that a drag from government measures was in line with market expectations,” said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley. “Still, there are a lot of uncertainties over the outlook of Japan’s inflation. We don’t know how and when the government will really end all this support, and businesses could pass their costs onto consumers more than expected.”
An index that excludes energy and fresh food came in stronger than expected at 3.2 per cent, as the pace of gains in consumer durables and processed food continued to accelerate. That suggests the deeper price trend may be more solid than the central bank’s current view, despite the peaking of the core inflation figure.
A key item in Kishida’s latest stimulus package is a series of utility subsidies, including a 20 per cent discount on household electricity rates. Natural gas and hotel prices are also being held down by government aid. High commodity prices have been one of the main drivers of recent inflation in the resource-poor country, as the war in Ukraine drags on. Still, economists largely agree with the BOJ’s view that the price trend will weaken as the year progresses.
Ueda is set to take the helm of the bank from April, assuming he’s approved by parliament, and many don’t see him rushing towards normalisation based on his comments in confirmation hearings and earlier remarks indicating he doesn’t favour small tweaks to the BOJ’s main yield curve control programme.
At his parliamentary confirmation hearings on Monday, the academic echoed governor Haruhiko Kuroda’s view that current price hikes are largely led by cost-push factors, and it will take more time for the inflationary trend to stick.
“Today’s results are probably within BOJ’s expectations so this won’t lead to change the BOJ’s policy view,” said Tonouchi. “I don’t have any strong opposing view against the BOJ saying that inflation is likely to be below 2 per cent around the middle of next fiscal year.”
Economists polled by Bloomberg are now focusing on June as the most likely month for changes under Ueda, with two-thirds of them expecting adjustments by then.
The BOJ is not expected to tweak policy at Kuroda’s last meeting next week. Officials at the central bank are looking to monitor the impact of early changes rather than taking further action, according to people familiar with the matter.
Separate data showed Japan’s unemployment rate edged down to 2.4 per cent in January. Analysts had expected the jobless rate to hold steady at 2.5 per cent.
Other data also pointed to tightness in the labour market, with the job-to-applicant ratio remaining high at 1.35 in January, meaning there were 135 positions available to every 100 applicants.
Strong demand in the labour market will keep upward pressure on wages, though it remains to be seen if pay gains this year will match the increases sought by the central bank and the government to support households and stabilise inflation and growth.
Going ahead, electricity prices will likely cause continued uncertainty in the price outlook, as utility operators are seeking to raise rates later in the year in response to surging fuel costs and the weak yen. Tokyo Electric Power announced that it had applied to lift residential electricity prices by about 30 per cent from June.
There’s also little sign that price increases for processed food will end anytime soon. More than 3,400 food items will be raised in price in March alone, almost double the number a year ago, according to a Teikoku Databank report. The data firm also says that the number of food products subject to price hikes this year will top 20,000 as soon as August. BLOOMBERG
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