Inflation in Japan’s capital keeps slowing, takes pressure off BOJ

By Leika Kihara and Takahiko Wada

TOKYO (Reuters) – Core inflation in Japan’s capital slowed for the second straight month in December as cost-push price pressures continued to ease, data showed on Tuesday, taking some pressure off the central bank to rush into exiting ultra-loose monetary policy.

The Tokyo inflation data, closely watched as a leading indicator of nationwide price trends, is among key factors the Bank of Japan (BOJ) will scrutinise at the next policy-setting meeting on Jan. 22-23.

Separate data showed household spending fell for the ninth straight month in November, underscoring the fragile nature of Japan’s economy that may also keep the BOJ cautious about phasing out its massive stimulus too soon.

Tokyo’s core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, rose 2.1% in December from a year earlier, government data showed, matching a median market forecast. It followed a 2.3% rise in November and matched a low hit in June 2022.

The so-called “core core” index that strips away both fresh food and fuel prices – closely watched by the BOJ as a gauge of broader price trends – rose 3.5% in December after a 3.6% gain in November, the data showed.

“Companies are probably keen to keep raising prices but the pace of hikes appears to be slowing,” said Yoshiki Shinke, senior executive economist at Da-ichi Life Research Institute.

“The hurdle for achieving sustained 2% inflation in Japan is high,” he said, adding that he expects the nationwide core consumer inflation rate to fall below the BOJ’s 2% target late this year through early next year.

Energy prices fell 18.8% in December from a year earlier, more than a 16.7% drop in November, due to government subsidies and the base effect of last year’s spike, the data showed.

The rise in food prices also slowed to 6.0% in December from 6.4% in November in a sign that cost-push pressures were dissipating.

With inflation having exceeded the BOJ’s 2% inflation target for more than a year, many market players expect the bank to start phasing out its massive stimulus some time this year.

BOJ Governor Kazuo Ueda has stressed the need to keep policy ultra-loose until recent cost-push inflation is replaced by a demand-driven increase in prices backed by solid wage gains.

Market players trimmed back bets of a January policy shift after a strong earthquake that hit western Japan last week and Ueda’s comments in a recent interview that he was in no rush to unwind ultra-loose monetary settings.

The BOJ’s quarterly meeting of regional branch managers on Thursday could offer clues on how convinced policymakers have become over prospects of sustained and broad-based wage gains, some analysts said.

The BOJ remains a dovish outlier among global peers, having maintained ultra-loose policy even as central banks elsewhere have raised interest rates aggressively and kept them elevated to fend off inflation risks.

(Reporting by Leika Kihara and Tahiko Wada; Editing by Jamie Freed and Christopher Cushing)