Japan Inflation Slows For Second Month

Japan’s core inflation weakened for the second consecutive month in April, but the slowdown is likely to be temporary given the expected increase in wages and a weaker yen adding upward pressure on import prices, and this is set to keep the Bank of Japan cautious regarding the future path of interest rates.

Core inflation that excludes fresh food softened to 2.2 percent from 2.6 percent in the previous month, the Ministry of Internal Affairs and Communications said.

The indicator continued to stay above the 2 percent target for 25 straight months and matched economists’ expectations.

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The consumer price index excluding prices of fresh food and energy rose 2.4 percent year-on-year, which was slower than the 2.9 percent increase in March. This was the weakest since September 2022.

Headline CPI inflation fell to 2.5 percent in April from 2.7 percent in the prior month.

Services inflation eased to 1.7 percent in April from 2.1 percent, mostly due to a one-off decline in education fees. Food prices grew at a slower pace of 3.5 percent.

Capital Economics economist Marcel Thieliant said the bank is still expected to deliver a final rate hike at its July meeting and it would not be able to tighten monetary policy much further.

The economist said BoJ policymakers prefer to think in narratives and have often ignored economic data.

The prevailing narrative is that the strength in pay hikes in this year’s spring wage negotiations will fuel a virtuous cycle between prices and wages, Thieliant added.

“A choppy inflation path was expected due to various government programs, so the temporary slowdown won’t change the BoJ’s policy normalization stance,” economists at ING said.

April data marks the start of the current fiscal year. Japanese companies are set to implement wage increases in the fiscal year and these hikes are likely to boost consumption and also price pressures. Moreover, weaker yen has been pushing up import cost.

Japanese households curbed their consumption due to higher prices. The economy contracted 2.0 percent in the first quarter as private consumption eased 0.7 percent.

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