Tokyo Inflation Slowdown Won’t Knock the BOJ Off Rate Hike Path
(Bloomberg) -- Consumer price growth in Tokyo moderated while staying well above the central bank’s inflation target, keeping authorities on track to consider more interest rate increases after they hiked earlier this month for the first time since 2007.
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Prices excluding fresh food rose 2.4% in March in the capital, slowing slightly from 2.5% in February, the ministry of internal affairs said Friday. The reading matched economists’ estimates.
Tokyo’s figures serve as a leading indicator of the national data to be announced April 19.
The consumer inflation data for Japan’s capital come little more than a week after the BOJ closed the door on its negative interest rate while pledging to keep policy settings accommodative for a spell. Even with the deceleration, the data will likely keep market attention focused on potential further rate hikes by the bank, with a majority of economists surveyed by Bloomberg predicting another rate increase by October.
A deeper measure of the inflation trend that strips out fresh food and energy prices slowed to 2.9%, in line with the consensus estimate. Service price gains slowed to 2% from 2.1% in the previous month. BOJ Governor Kazuo Ueda has cited service price trends as something he’s watching closely.
Agreements to lift wages “from this year’s pay negotiations have been quite strong,” said Moe Nakahama, a research associate at Itochu Research Institute. “Service prices will rise going forward, supported by accelerating increase in labor costs.”
Adding to the case for further hikes is the yen, which weakened Wednesday to a 34-year low versus the dollar, prompting a blast of verbal warnings from government officials intent on putting a floor under the currency.
The weak yen will keep up price pressure stemming from imports. Ueda said last week that the decision to lift the policy rate was partly driven by concerns that waiting too long might compel authorities to raise rates rapidly.
BOJ Board Member Naoki Tamura Wednesday signaled his desire to gradually keep raising interest rates as the bank further pursues policy normalization, noting that keeping policy easy isn’t inconsistent with another hike. “The continuation of an easy financial environment doesn’t mean there won’t be any more rate hikes at all,” he said.
The BOJ’s board will next convene in April, when it will update its price outlook. In its latest report from January, the bank projected the country’s consumer prices would rise by 2.4% in the fiscal year beginning in April before growth slows to 1.8% in the following year.
What Bloomberg Economics Says...
“For the Bank of Japan, a mild pullback in the core gauge — which is comfortably above its 2% target and set to stay there for a couple of quarters — is unlikely to change the bigger picture. Our view is the BOJ is now resolved to normalize its policy.”
— Taro Kimura, economist
For the full report, click here.
In Friday’s report, energy prices declined at a slower pace than in previous months, pushing up inflation. Factors weighing on inflation included costs for processed foods, which advanced at a slower pace than in previous months.
One factor that could spur price gains in coming months is the end of fuel subsidies. Prime Minister Fumio Kishida’s government is preparing to stop providing subsidies for electricity and gas charges from June, after halving them in May, according to a report by NHK. The measures that Kishida implemented in early 2023 have weighed on national inflation by as much as 1 percentage point over the year.
“Energy prices will be pushed up substantially in stages,” Nakahama said. “National inflation will slow to the mid-2% for a time, then accelerate back to the upper 2%.”
In other data Friday, retail sales gained 4.6% in February from a year earlier. Industrial output fell 0.1% in February versus the previous month, a weaker result than the consensus estimate of 1.3% growth. Signs of fragility in the manufacturing sector could keep the BOJ cautious as it plots its policy course in 2024.
A separate set of data showed tightness in the labor market easing slightly in February. The labor ministry reported that the unemployment rate rose to 2.6% in February and the job-to-applicants ratio moderated to 1.26. Still, more than half of surveyed companies said that they face a shortage of permanent employees, the highest level since 2018, according to separate a report by Teikoku Data bank.
Authorities are hopeful that wage gains spurred in part by the nation’s chronic labor shortage may support a recovery in consumers’ appetite for spending. Japan’s biggest umbrella group of labor unions, Rengo, said this month that companies agreed in negotiations to give 5.3% wage gains in the coming fiscal year, the biggest in more than 30 years and much higher than analysts forecast.
Whether the momentum will continue hinges on whether this upward wage trend will spill over to small and medium sized firms, which employ 70% of Japan’s workers. The results of pay talks that include more smaller businesses will be released in the next month.
(Adds economist’s comments)
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