Japan’s core inflation slowed for a second straight month in April, likely signaling that the Bank of Japan (BoJ) will be patient in raising interest rates as consumption remains fragile.
While inflation is tracking comfortably above the central bank’s 2 percent target, policymakers are keen to see Japan’s price impulse bear the stamp of sustainable domestic demand. The nationwide core consumer price index (CPI), which excludes fresh food items, rose 2.2 percent from a year earlier after gaining 2.6 percent in March, matching the median market forecast.
The “core core” index, which excludes both fresh food and energy costs and is closely watched by the BoJ as a key gauge of broader inflation trends, rose 2.4 percent after increasing 2.9 percent in March. This marked the slowest growth since September 2022.
Inflation data crucial for BoJ’s rate hike decisions
Inflation data is seen as key to further decisions on rate hikes by the BoJ, which wants to push interest rates higher, albeit gradually, after ending negative rates in March in a landmark shift away from its decade-long super-easy monetary policy.
Koya Miyamae, senior economist at SMBC Nikko Securities, said, “Weak consumption has made it difficult to raise prices in April and May.” He added that the BoJ would need to see the core-core inflation stop cooling down before raising interest rates, suggesting that “a rate hike in June, July seems a bit premature.”
Read more: Japan posts $3 billion trade deficit in April despite surge in exports
Wage growth and pricing power key for BoJ’s policy normalization
The BoJ has stated that a virtuous cycle of sustained, stable achievement of its 2 percent price target and strong wage growth is crucial for normalizing policy. Markets are closely watching how much of the large wage increases agreed to this spring would translate into selling prices and impact inflation.
Meanwhile, markets are speculating that the yen’s persistent weakness could force the BoJ to move forward the next interest rate hike to soften its impact on the cost of living. This has led to mounting bets for further BoJ policy tightening this year, sending Japan’s 10-year government bond yield to 1 percent briefly this week, a level unseen since May 2013, in the very early days of former BoJ Governor Haruhiko Kuroda’s unprecedented policy-easing experiment.
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