Core inflation slows down in Japan

Japan's core inflation slowed sharply in November to a pace that was not seen before in over a year, as per data on Friday. The trend highlights easing cost-push pressures, giving the Bank of Japan (BOJ) respite before phasing out its humongous monetary stimulus.

Even as service prices continue to rise, some analysts doubt whether the increase will accelerate enough to create demand-driven inflation, a prerequisite for the central bank to exit ultra-loose policy.

Inflation is coming down as supply-side factors which push up prices are fading, an associate economist at Moody’s Analytics said.

“Evidence of demand-driven inflation, a by-product of strong domestic spending and wage gains, remains preciously scarce," Jeemin Bang, an associate economist at Moody's Analytics said.

The American credit rating and analytics firm said their baseline is for the Japanese central bank to drop negative interest rates in 2024.

“We expect the central bank will maintain some level of support given the economy's weak state," Bang added.

The core consumer price index (CPI), excluding volatile fresh food but not excluding fuel costs, rose 2.5 per cent in November from a year earlier, matching market forecasts and slowing from a 2.9 per cent gain in October.

It was the slowest pace of rise since a 2.4 per cent growth marked in July 2022.

Prices of goods rose 3.3 per cent in November compared to a year earlier, becoming slower than a 4.4 per cent gain in October due to falling fuel costs as well as moderating food price hikes.

However, services inflation accelerated to 2.3 per cent in November from 2.1 per cent in the previous month, which underscores the BOJ's view that prospects of higher wages are prodding some firms to pass on rising labour costs.

"We expect companies to keep raising service prices, though there's no change to our view that overall inflation will slow as a trend," Takeshi Minami, chief economist at Norinchukin Research Institute said.

Minami added that the Japanese central bank “probably won't normalise policy for the time being."

Japan has seen inflation hold above 2 per cent since April 2022 and some firms have signalled their readiness to keep raising wages, increasing chances of BOJ letting go of its status of a dovish outlier among global central banks.

But the BOJ kept ultra-loose policy intact on December 20 and Governor Kazuo Ueda left no hints of an early exit.

Ueda emphasised that the bank needed to continue scrutinising if a positive wage-inflation cycle will fall in place. Minutes of the BOJ's October meeting released on Friday showed board members remaining divided on how soon Japan can see conditions for an exit fall in place.

Over 80 per cent of economists expect the BOJ to end its negative rate policy next year with half of them predicting April as the most likely timing, as per a Reuters poll last month.
Some see the chance of a policy shift in January.

(With Reuters Inputs)