Tokyo inflation: The pace of inflation has decelerated in Tokyo, falling below the central bank's targeted 2 per cent, marking its slowest rate in nearly two years. 

The latest data, revealed on Friday, underscores the belief among policymakers that cost pressures will continue to ease in the coming months.

Additional figures indicate that corporate service inflation remained stable in December, holding at a nearly nine-year high. This suggests that while service prices are on the rise, they are starting to supplant increasing costs as the primary driver of price gains.

This data release comes in the wake of the Bank of Japan's (BOJ) recent indication, made on Tuesday, that it is growing more confident in its ability to sustainably achieve its 2 per cent inflation target. 

Such a signal suggests that an end to negative interest rates may be on the horizon.

The core consumer price index (CPI) in Tokyo, considered a leading indicator of nationwide inflation trends, climbed by 1.6 per cent in January compared to the previous year, falling short of the market's median forecast of a 1.9 per cent increase.

Excluding volatile fresh food but including fuel costs, Tokyo's core inflation rate has slowed for the third consecutive month, reaching its lowest point since March 2022, primarily due to declining energy prices. This contrasts with the 2.1 per cent rise observed in December.

The "core-core" index, which excludes both fresh food and fuel prices and is closely monitored by the BOJ for broader price trend analysis, rose by 3.1 per cent in January, down from 3.5 per cent in December.

Toru Suehiro, Chief Economist at Daiwa Securities, noted, "A lot of food prices rose last January, which probably helped narrow the year-on-year pace of increase this month," suggesting that Japan may continue to experience a period of disinflation.

Nationwide inflation has surpassed the BOJ's 2 per cent target for over a year, fueling expectations that the central bank may abandon negative interest rates this year, potentially in March or April.

The BOJ has committed to maintaining ultra-loose policy until recent inflation, driven by rising raw material and fuel import costs, transitions into price increases fueled by robust domestic demand and higher wages.

Attention is now turning to whether wages will rise sufficiently to support consumption and facilitate Japan's sustainable achievement of the BOJ's 2 per cent inflation target, a precondition for scaling back its massive monetary stimulus.

Minutes from the BOJ's December meeting, released on Friday, revealed a lack of consensus among the nine-member board regarding the likely timing and sequence of an exit from ultra-loose monetary policy. 

However, they did agree to intensify discussions on the appropriate pace of future interest rate hikes, indicating preparations for a near-term policy adjustment.

“One member was quoted as saying, 'The BOJ shouldn't miss the opportunity to revise policy by being overly cautious' of ending ultra-loose policy.”

(With Reuters Inputs)