Core consumer inflation in Japan’s capital slowed in December with moderating cost pressure for food but stayed above the central bank’s 2 percent target, data showed yesterday, firming the case for further interest rate hikes.
The data back up the Bank of Japan’s (BOJ) view that core inflation would slide below its 2 percent target in coming months on easing cost pressure, before resuming a demand-led increase that justifies additional rate increases.
Some analysts warn of risk that renewed yen declines could prod firms to keep raising prices, leading to sticky, cost-led inflation that could quicken the pace of BOJ rate hikes.
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“Today’s data suggests food inflation may be peaking. But the weak yen may give firms an excuse to resume price hikes for food, which may keep inflation elevated,” said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute.
“The pace and timing of BOJ rate hikes will depend much on how the yen moves and how they affect firms’ price-setting behavior,” he said.
The Tokyo core consumer price index, which excludes volatile costs of fresh food, rose 2.3 percent in December last year, less than market forecasts for a 2.5 percent gain and slowing from a 2.8 percent increase last month.
While the slowdown is largely due to the base effect of last year’s bump-up in utility bills, it reflected moderating pressure from food costs that have been the main factor pushing up broader inflation.
A separate index for Tokyo that factors out fresh food and fuel costs — closely watched by the BOJ as a measure of demand-driven prices — rose 2.6 percent in December from a year earlier after a 2.8 percent increase last month.
The data would be among the factors the BOJ scrutinizes at its next policy meeting on January 22 and 23, when the board issues fresh quarterly growth and inflation forecasts.
Separate data released yesterday showed Japan’s factory output fell 2.6 percent last month from October, more than market forecasts for a 2.0 percent drop, due to cuts in automobile and lithium-ion battery production.
Manufacturers surveyed by the government expect output to rise 1.3 percent this month and 8 percent next month.
Retail sales rose 1 percent last month year-on-year, in line with a median market forecast for a 0.9 percent increase.
Japan’s government yesterday approved a record US$785 billion budget for the next fiscal year, which will likely underpin consumption but add strain to the country’s tattered finances.
The BOJ raised interest rates last week to a 30-year high of 0.75 percent, taking another landmark step in ending decades of huge monetary support in a sign of its conviction Japan is progressing toward hitting its 2 percent inflation target.
With core inflation exceeding the BOJ’s target for about four years, Governor Kazuo Ueda has signaled the BOJ’s readiness to keep raising rates if the economy continues to improve, backed by solid wage gains.
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