Japan’s core inflation saw a decline in March with the index measuring broader price trends falling below 3 percent for the first time in over a year. The data, released on Friday, underscores the challenge facing the Bank of Japan (BOJ) as it grapples with the implications of yen weakness on its policy deliberations.
The nationwide core consumer price index (CPI), excluding fresh food items but including energy, rose by 2.6 percent in March compared to the previous year, in line with market forecasts. However, it decelerated from February’s 2.8 percent rise, primarily driven by a slowdown in food price increases. Despite the moderation, inflation remains comfortably above the Bank of Japan’s 2 percent target.
The index for price gains, excluding fresh food and energy costs, moderated to 2.9 percent in March, down from 3.2 percent in February. This marks the first time since November 2022 that the index has fallen below 3 percent. Analysts attribute this deceleration to unexpected factors such as yen depreciation and the rise in crude oil prices amid Middle East tensions. While the slowing growth rate of goods prices is within the BOJ’s expectations, currency depreciation poses new challenges for Japan.
Central bank’s policy dilemma
Japan recently ended its decade-long loose monetary policy by lifting negative interest rates, prompting speculation about the timing of further rate increases. However, with the yen’s decline potentially pushing up inflation, Japan’s central bank faces policy uncertainty while trying to safeguard against economic instability. BOJ governor Kazuo Ueda hinted at the possibility of rate hikes if yen depreciation significantly impacts inflation.
Markets expect the Bank of Japan to keep short-term interest rates unchanged at its next policy meeting on April 26. During the meeting, Japan’s central bank will also release new inflation and GDP growth projections.
Read: ECB signals potential June interest rate cut despite rising oil prices, weaker euro
Concerns over real wages
Despite Japan’s largest wage hikes in 33 years, inflation-adjusted real wages have continued to decline for nearly two years. A weakening yen drove up import prices. However, it threatens to further decline households’ purchasing power and dampen consumption. Government officials express vigilance over the impact of recent wage increases on service prices, underscoring the need for close monitoring amid evolving economic conditions.
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