Japan's inflation beats forecasts, end of negative rates in sight

Japan's core consumer inflation slowed for a third straight month in January but beat forecasts and held at the central bank's 2 per cent target, keeping alive expectations it will end negative interest rates by April. The 2.0 per cent gain in the core consumer prices index (CPI) was slower than the 2.3 per cent increase in December, Internal Affairs and Communications ministry data showed on Tuesday, underscoring views waning cost-push inflation from commodity imports could ease the pain of higher living costs.

However, the gain beat median market forecasts for a 1.8 per cent rise, reaffirming expectations hefty pay hikes will be offered by big firms at labour-management wage talks on March 13 that would pave the way for the Bank of Japan (BOJ) to end negative interest rates in March or April. "The January CPI leaves open the possibility of the BOJ hiking its policy rate at the March meeting if preliminary Shunto results due a few days before the meeting are encouraging," said Marcel Thieliant at Capital Economics, referring to the Japanese name for the wage talks. "We still consider an April hike more likely," Thieliant added. "For one thing, inflation will jump well above 2 per cent in February as base effects from the launch of energy subsidies a year ago kick in, which would allow the Bank to tell a more compelling story that inflation remains strong," he added.

Japan's core consumer price index includes oil products but excludes fresh food prices. The slowdown was due in part to a big drop in energy costs, reflecting the base effect of last year's sharp rise and government subsidies to curb gasoline and utility bills, in a sign of waning cost-push pressure that had kept core inflation at or above the BOJ's 2 per cent target since April 2022.

Going forward, the key is whether wage hikes beat inflation enough to give households purchasing power, so companies can continue to pass on costs and keep inflation durably at the BOJ's 2 per cent target, analysts say. The so-called "core core" index that strips away both fresh food and energy prices, closely watched by the BOJ as a narrow gauge of the broader price trend, rose 3.5 per cent year-on-year in January, following a 3.7 per cent rise in December.

"As far as prices are concerned, there's nothing in today's data that would stop the BOJ's move towards ending negative rates, which I think will come in April," said Izuru Kato, chief economist at Totan Research. "At the same time, the BOJ needs to strike a balancing act in view of two straight quarters of contraction in gross domestic product (GDP) and lackluster private consumption, while the weak yen have created stagflation-like situation," he added, referring to a combination of low growth and high inflation.