Tokyo’s core consumer price index (CPI) accelerated in December, fueling market anticipation of an impending interest rate hike by the Bank of Japan (BOJ). However, a simultaneous decline in factory output signals a potential softening of the export-driven economy, adding complexity to the BOJ’s upcoming policy decisions.
The Tokyo core CPI, excluding fresh food costs, saw a 2.4% year-on-year increase in December, slightly below market expectations of 2.5%, but still up from November’s 2.2%. This indicator, along with other economic data, will be carefully considered by the BOJ during its policy meeting scheduled for January 23-24. Some analysts predict a short-term interest rate hike during this meeting.
A key measure favored by the BOJ, which excludes both fresh food and fuel costs to better gauge demand-driven inflation, registered a 1.8% year-on-year rise in December, a slight decrease from November’s 1.9%. Meanwhile, service-sector prices continued their upward trend, rising by 1.0% in December following a 0.9% increase in November. This reinforces the BOJ’s assessment that sustained wage growth is empowering businesses to raise service charges.
Economists like Masato Koike of Sompo Institute Plus suggest that the potential for higher wages translating into increased service prices could encourage the BOJ to normalize its policy. The Tokyo inflation data, often viewed as a precursor to nationwide trends, provides crucial insights into Japan’s progress towards achieving the BOJ’s 2% inflation target – a key condition for further rate hikes.
However, counterbalancing the positive inflation data, factory output experienced a 2.3% decline in November, marking its first drop in three months. This contraction, attributed to reduced production of chip equipment and automobiles, raises concerns about the robustness of Japan’s economic recovery and could potentially postpone the BOJ’s rate hike timeline.
Some analysts point to the fact that the rise in Tokyo inflation was primarily driven by increased utility bills and food prices, factors that could dampen consumer spending and deter businesses from implementing further price increases. Experts like Toru Suehiro, chief economist at Daiwa Securities, argue that underlying inflation, excluding the impact of rising utility costs, shows no significant strength, leading him to believe the BOJ will likely maintain its current interest rate in January.
After ending negative interest rates in March and raising its short-term policy rate to 0.25% in July, the BOJ has maintained a steady stance on rates, including at its recent meeting. Governor Kazuo Ueda indicated a preference for more data on next year’s wage momentum and clarity on the incoming U.S. administration’s policies before considering another rate hike.
Despite the BOJ’s current cautious approach, a Reuters poll revealed that all respondents anticipate a rate hike to 0.5% by March of next year. The central bank’s decision to hold rates steady this month has intensified market focus on whether the anticipated hike will occur at its January meeting or be deferred to the subsequent review in March. The interplay between rising inflation and weakening factory output will undoubtedly be central to this decision.
