Tokyo CPI Cools Below BOJ Target, Complicating Rate Hike Message

A Tokyo inflation gauge eased to the slowest pace in more than a year as Prime Minister Sanae Takaichi’s utility subsidies curbed household energy costs, posing a communication challenge for the Bank of Japan as it looks to proceed with interest rate hikes.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — A Tokyo inflation gauge eased to the slowest pace in more than a year as Prime Minister Sanae Takaichi’s utility subsidies curbed household energy costs, posing a communication challenge for the Bank of Japan as it looks to proceed with interest rate hikes.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.Consumer prices excluding fresh food rose 1.8% in the capital from a year earlier in February, the smallest gain since October 2024, according to the Ministry of Internal Affairs on Friday. That was a touch stronger than the median economist forecast of 1.7%. The Tokyo CPI report is a leading indicator for national price trends.Friday’s data add to evidence that Japan’s price growth has entered a cooler phase largely owing to Takaichi’s anti-inflation steps and slowing growth in food costs. Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.“This report makes almost certain that national core CPI will also come in under 2% this month,” said Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute. The price gauge was widely expected to weaken for a third straight month as the impact of government steps to lower utility bills impacts data. The yen strengthened a tad after the slightly more robust-than-expected price data, trading around 155.76 to the dollar Friday morning in Tokyo.A measure that also strips out energy to reflect the underlying strength of the inflation trend increased 2.5%, staying above the BOJ’s 2% target, an outcome that supports the central bank’s view that the inflation trend remains intact. While the BOJ will look past temporary factors in making policy decisions, it’s less clear how Takaichi’s government will view the slowdown, especially if it lasts. That’s especially true after the prime minister signaled her support for easy monetary policy with her first nominations for the central bank’s board earlier this week.“As inflation decelerates, that will present a communications challenge for the BOJ to justify a rate hike,” Shinke said. “So they will likely need to get more creative.”The report showed that energy prices dropped 9.2% from a year earlier as the impact of the government’s three-month subsidy program to lower electricity and gas bills took effect in January. The ministry calculated the overall impact of prices subsidies and the phasing out of a gasoline tax lowering the overall gauge of inflation by about a quarter percentage point. The government estimates that its latest program of measures will save ¥7,300 ($46.75) for an average household over the course of the quarter.

What Bloomberg Economics Says“Tokyo’s soft February core CPI will reinforce the Bank of Japan’s cautious stance on the timing of its next rate hike.”— Taro Kimura, economistFor the full report, click hereThe BOJ has already said that inflation is likely to ease below its 2% target in the first half of this year mainly because of the utility subsidies and distortions caused by comparisons with a year ago, when food prices surged. Officials have emphasized that they are focusing on underlying inflation trends rather than temporary, one-off influences.The elevated cost of food has become a critical subject in political debates after soaring living costs played a primary role in two major electoral setbacks for the ruling Liberal Democratic Party before Takaichi took the helm in October. Japanese households now devote a record portion of their spending to food, limiting scope for discretionary outlays.Takaichi’s leadership appeal, along with her commitment to quelling inflation, enabled her to lead the LDP to its most decisive triumph in history earlier this month. The prime minister surprised some BOJ watchers earlier this week by nominating two professors with reflationist backgrounds to become new board members later this year in an apparent sign of her desire to see easy monetary conditions continue.Friday’s data alone aren’t likely to shake the BOJ’s resolve to raise its benchmark rate when its economic outlook is realized. With the yen’s lingering weakness, traders see a roughly 69% chance of a rate hike by April as of Friday, according to pricing in the overnight swaps index.The BOJ delivers its next policy decision on March 19. In other releases Friday, factory output rose a weaker-than-expected 2.2% in January from the previous month, led by gains in vehicle production and plastics, the Ministry of Economy, Trade and Industry reported. That compared with a consensus forecast for a 5.5% gain. Output rose 2.3% from a year earlier. Retail sales gained 4.1% in January compared with the previous month, coming in above expectations. Still, the year-on-year gain of 1.8% again failed to outpace core inflation an indication that the central bank needs to keep an eye on how consumption is responding to rising prices.“It makes sense for the BOJ to wait until June or July to carefully watch the impact of rate hikes but I won’t be surprised if they move by April,” Shinke said. —With assistance from Gareth Allan.(Adds more details from inflation, factory output and retail sales reports.)Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.