Japan’s Core Inflation Slows Below 3% Threshold, Maintains Above Central Bank Target
Japan’s core inflation rate in September dipped below the 3% mark for the first time in over a year but remained above the central bank’s target. This development has sparked expectations that policymakers will gradually phase out ultra-easy monetary policy. The Bank of Japan (BOJ) will closely analyze this data, along with other indicators, during its two-day policy meeting ending on October 31st. At the meeting, the BOJ will also disclose its latest quarterly growth and price forecasts.
Core Consumer Price Index (CPI) and Utility Bills
The government’s data revealed that the core consumer price index (CPI), excluding volatile fresh food costs, rose by 2.8% in September compared to the previous year. This figure slightly exceeded the median market forecast of a 2.7% gain. However, it did show a slight easing from the 3.1% recorded in August. Utility bills experienced a decline, reflecting the delayed impact of past oil price drops. Consequently, inflation fell below 3% for the first time since August 2022.
The prices of food and daily necessities continued to rise, albeit at a slower pace than in August. This indicates a gradual easing of cost-push pressures. On the other hand, the core-core index, which excludes fresh food and fuel costs, rose by 4.2% in September compared to the previous year, slightly slowing down from the 4.3% gain in August.
Uncertainty Surrounding Inflation and Policy Changes
Economists anticipate that inflation will moderate in the coming months. However, a resurgence in oil costs and continued depreciation of the yen could prompt companies to raise prices once again. Shinke Yoshiki, chief economist at Dai-ichi Life Research Institute, emphasizes the uncertainty surrounding the expected pace of declines in inflation. He suggests that core inflation may not fall below 2% until the latter half of 2024.
Market speculation suggests that the BOJ may soon end negative short-term interest rates and yield curve control in response to increasing inflationary pressure. However, the BOJ has downplayed the immediate possibility of reducing its massive stimulus. They argue that the recent price rises driven by costs need to transition into demand-driven increases before considering interest rate hikes. The BOJ is particularly focused on whether wages will rise sufficiently to support consumption.
Consumers Feeling the Pinch
There are growing signs that consumers are feeling the impact of rising prices as inflation-adjusted real wages continue to decline. In a quarterly meeting, some BOJ regional branch managers expressed concerns about consumers becoming more sensitive to price hikes and reducing their purchases at supermarkets. Additionally, a government survey highlighted the souring sentiment among taxi drivers, restaurants, and other service-sector firms in September, underscoring the fragile nature of consumption.
While companies offered wage increases unseen in three decades this year, policymakers are focused on whether this trend will continue into the following year and extend to smaller firms across regions.
Outlook for Tokyo CPI
A Reuters poll projects that the core consumer inflation in Tokyo, considered a leading indicator for nationwide figures, will likely remain steady at 2.5% in October, the same as the previous month. The Tokyo CPI data is scheduled for release on October 27th.
Overall, Japan’s core inflation rate has dipped below the 3% threshold but remains above the central bank’s target. Policymakers are expected to gradually phase out ultra-easy monetary policy. However, uncertainty persists regarding the pace of inflation decline and the potential impact of policy changes on the economy.
