Japan January inflation at 2.0%; end to negative interest rates in sight

Nurluqman Suratman

27-Feb-2024

SINGAPORE (ICIS)–Japan’s core consumer inflation in January rose by 2.0%, matching the Bank of Japan’s (BoJ) price stability target and supporting expectations that the central bank will end its ultra-low interest rates policy by April.

  • Consumer inflation at lowest since March 2022
  • BoJ’s benchmark interest rate at -0.1% since Jan 2016
  • Weaker yen drives up import costs

The core consumer price index (CPI) – which excludes volatile fresh food prices – in January weakened from 2.3% in the previous month, marking its third straight month that the country’s inflation has slowed, data from the Statistics Bureau showed on Tuesday.

January’s core CPI reading also marks its lowest point since March 2022 as cost of imported raw materials decreased but the number came in higher than market expectations.

“[BoJ] Governor Kazuo Ueda has expressed confidence of anchoring inflation above the government’s target of 2% and inflation reading is expected to pick up in February as the impact from the government’s price relief measures fades on a year-on-year basis, boosting market expectations that the BOJ is nearing the end of its ultra-loose monetary policy soon,” Malaysia-based HongLeong Bank said in a research note on Tuesday.

The sharp depreciation of the yen has caused Japan’s import bill to soar.

At 03:45 GMT, the yen was trading at Y150.48 against the US dollar, down by more than 6% from the start of the year.

Source: xe.com

Japan relies significantly on imported crude oil as it lacks substantial domestic production. About 80-90% of its crude oil imports are sourced from the Middle East, according to the International Energy Agency (IEA).

While the country’s domestic refineries can satisfy demand for transportation fuels, it imports liquefied petroleum gas (LPG) and naphtha heavily as domestic production does not meet the required levels.

ALL EYES ON BOJ
The BoJ is widely expected to end its negative interest policy, introduced in January 2016, by April this year.

The policy was kept for years to stimulate credit growth and investment, in the central bank’s fight against deflation.

In its latest meeting in January, the central bank kept its benchmark interest rate at -0.1%, but its quarterly economic report hinted at possible policy normalisation.

For the whole of 2023, Japan’s consumer inflation posted an annualized average of 3.1%, up from the previous year’s 2.3% average and the highest recorded since 1982, because of the weaker yen, which made imports more expensive.

Despite BoJ officials’ confidence in hitting the 2% inflation target, recent data undermines this view following two consecutive quarters of GDP contraction due to weak consumption.

Japan’s economy shrank by an annualised rate of 0.4% in the fourth quarter of 2023, following a 2.9% contraction in the July-September period. For the whole of 2023, it posted a 1.9% growth.

Because of the recession in the second half of last year, the country was overtaken by Germany as the third-biggest economy in the world.

“The challenging growth outlook for Japan adds further risk to a delay to our projected timeline for BOJ normalisation in 2024,” Singapore-based UOB Global Economics & Markets Research said.

“That said, we still expect BOJ’s normalisation to commence only after 2024’s Shunto Spring wage negotiations between major corporations and unions which takes place around March,” it added.

Shunto is the Japanese term for “spring wage offensive”. The season, which is typically between February and April, refers to a period when thousands of Japanese labor unions simultaneously negotiate wages and working conditions with their employers.

Focus article by Nurluqman Suratman

Thumbnail image: Large container cranes stand at a port in Tokyo, Japan on 15 February 2024. (FRANCK ROBICHON/EPA-EFE/Shutterstock)

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