Japan's core inflation slowed for a second straight month in April, likely signaling that the Bank of Japan will be patient in raising interest rates as consumption remains fragile.
While inflation is tracking comfortably above the central
bank's 2% target, policymakers are keen to see Japan's price impulse bears the
stamp of sustainable domestic demand.
The nationwide core consumer price index (CPI), which
excludes fresh food items, rose 2.2% from a year earlier after gaining 2.6% in
March, government data showed on Friday. It matched the median market forecast.
The "core core" index, which excludes both fresh
food and energy costs and is closely watched by the Bank of Japan as a key
gauge of broader inflation trends, rose 2.4% after increasing 2.9% in March.
That marked the slowest growth since September 2022.
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.
"Weak consumption has made it difficult to raise prices
in April and May," Koya Miyamae, senior economist at SMBC Nikko
Securities, said.
He said the BOJ would need to see the core-core inflation
stop cooling down before raising interest rates. "I think a rate hike in
June, July seems a bit premature."
The BOJ has said a virtuous cycle of sustained, stable
achievement of its 2% price target and strong wage growth is crucial for
normalizing policy.
Markets are looking closely now at how much of the large
wage increases agreed this spring would translate into selling prices and
impact inflation.
Markets are meanwhile 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.
Mounting bets for further BOJ policy tightening this year
sent Japan's 10-year government bond yield to 1% 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.
A weakening yen, while a boon to exporters, pushes up import
prices. That in turn threatens to further exacerbate households' purchasing
power and weigh on consumption.
The Japanese economy contracted an annualized 2% in the
first quarter on weak consumption, while inflation-adjusted real wages declined
for two straight years through March as the rising costs of living outpaced
nominal wages.
Moody's Analytics said in a report that the solid result in
wage negotiations should deliver real wage growth in the second half of this
year.
However, it cautioned that the wages agreed with the
companies have yet to translate into economy-wide wage growth.
"This complicates the outlook for the Bank of Japan as
it looks to raise interest rates."
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