The latest data released on Tuesday revealed that core inflation in Japan’s capital, Tokyo, experienced a resurgence in February, surpassing the central bank’s target. This uptick came as the impact of government fuel subsidies faded, indicating that conditions conducive to ending negative interest rates were gradually materializing. However, a closer examination of the data highlighted a nuanced picture, with the index excluding energy costs showing a slowdown in the broader price trend.
The core consumer price index (CPI) in Tokyo, considered a leading indicator of nationwide inflation figures, recorded a 2.5% year-on-year increase in February, in line with market expectations. This marked a significant acceleration from the 1.8% rise observed in January. However, when volatile fresh food prices were excluded from the calculation, the index still indicated a noteworthy 3.1% annual gain. Although this figure represented a slowdown from the previous month’s 3.3% increase, it remained elevated, reflecting persistent inflationary pressures.
The deceleration in the index that excludes both fresh food and fuel costs to 3.1% in February, compared to a 3.3% gain in January, underscored the need for sustained momentum in wage growth to support consumer spending. This metric, considered a key indicator of underlying inflationary pressures, highlighted the challenge of achieving a balanced economic recovery.
The forthcoming policy-setting meeting of the Bank of Japan (BOJ) on March 18-19 will closely consider these inflation figures among other factors in determining the future trajectory of its stimulus programme. The central bank’s decision will hinge on its assessment of the overall economic conditions, including the pace of inflation, wage growth dynamics, and the broader macroeconomic landscape.
Marcel Thieliant, head of Asia-Pacific at Capital Economics, commented on the slowdown in the index excluding fresh food and energy, noting that the disinflation trend is not widespread and is mainly driven by a deceleration in processed food inflation. He suggested that the latest inflation data would not deter the Bank of Japan (BOJ) from considering an end to its negative interest rate policy next month.
Japan’s economy unexpectedly slipped into a recession at the end of last year, with weak corporate and household spending contributing to a 0.4% annualized contraction in GDP for the October-December period. Despite this, inflation has remained above 2% for an extended period, and the prospect of significant wage increases has heightened expectations that the BOJ will phase out its negative interest rate policy by April.
BOJ Governor Kazuo Ueda recently indicated that it was premature to conclude that inflation had reached sustainable levels to meet the central bank’s 2% target. However, he acknowledged that the economy was recovering moderately and showed promising signs regarding wage growth.
Currently, the BOJ maintains short-term rates at -0.1% and targets the 10-year government bond yield around 0% as part of its efforts to stimulate growth and achieve stable inflation in line with its 2% target.