Japan’s inflation meets BOJ target, falling to 2%

The bank views current inflation as driven by temporary factors like higher energy costs

Japanese inflation slowed less than expected to 2% in January, data showed Tuesday, hitting the central bank’s target and firming expectations of an end to its outlier negative rates policy.

Other major central banks, including the U.S. Federal Reserve have hiked borrowing costs because of rising prices since Russia’s invasion of Ukraine two years ago, and may soon start cutting again.

But haunted by decades of deflation, the Bank of Japan has stuck to its unorthodox sub-zero interest rates.

The nation slipped into a technical recession in late 2023, and the bank views current inflation as driven by temporary factors like higher energy costs.

Instead, it wants to see more evidence of a “virtuous cycle” of price increases fuelled by demand and higher wages.

According to government data released Tuesday, consumer prices rose 2.0% year-on-year in January from 2.3% in December, the third straight monthly easing.

The dip in the core consumer price index (CPI), which does not include volatile fresh food prices, was slightly less pronounced than expected, with economists polled by Bloomberg predicting 1.9%.

But the reading continued a broad trend of cooling inflation over the past year.

CPI last stood below the Bank of Japan’s 2% inflation target in March 2022, when prices rose 0.8% year-on-year.

Since then, inflation had increased to as high as 4.2% in January 2023 before gradually easing to 2.3% in December.

In 2023, it averaged 3.1% – the highest since 1982.

The January data “will support market speculation for an April rate hike,” ING economists said, although inflation could still be “choppy” in coming months.

“Moreover, Governor (Kazuo) Ueda mentioned last week that he believes that the Japanese economy is in a virtuous cycle where inflation will rise and wage growth and employment will strengthen,” ING added.

According to preliminary government data released this month, Japan’s economy shrank an adjusted 0.1% quarter-on-quarter in the last three months of 2023.

Growth for the third quarter was also revised downwards to negative 0.8%, meaning Japan was in technical recession in the second half of last year.

The data also confirmed that Germany overtook Japan in 2023 as the world’s third-biggest economy in dollar terms, primarily because of the sharp fall in the yen.

Marcel Thieliant at Capital Economics said the new inflation reading even brings a possible rate hike in March, although the following month remains “more likely.”

“For one thing, inflation will jump well above 2% in February as base effects from the launch of energy subsidies a year ago kick in, which would allow the bank to tell a more compelling story that inflation remains strong,” Thieliant said.

“What’s more, the bank will present forecasts for FY2026 for the first time at its April meeting, which will signal that it expects its two percent inflation target to be sustained in the long run,” he added.

Source: AFP

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