Tokyo’s March CPI eased again, marking the slowest growth in four years, but the Bank of Japan is still expected to raise rates in April.
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Tokyo's inflation data cooled unexpectedly again, weakening market expectations for a near-term rate hike by the Bank of Japan, causing the yen to weaken and approach the 160 mark.
Data released by Japan's statistics department on Tuesday showed that Tokyo's overall CPI in March rose 1.4% year-on-year, the lowest growth rate since March 2022; core CPI excluding fresh food increased by 1.7%, lower than the expected 1.8%, further falling below the Bank of Japan's 2% annual target.
Inflation data came in below expectations, and coupled with uncertainty in the economic outlook due to the Middle East situation, market expectations for an immediate rate hike by the Bank of Japan have cooled significantly. After the data release, dollar-yen received buying support and briefly approached the 160 mark intraday.
Bloomberg economist Taro Kimura believes the Bank of Japan is wary of rising oil prices pushing inflation up and raising medium and long-term inflation expectations. The possibility of a 25 basis point rate hike in April still exists, because previous policy normalization has not significantly slowed growth.
Comprehensive Cooling of Inflation, Core Indicators Reach 13-Month Low
Tokyo's inflation data for March showed a comprehensive decline.
Overall CPI fell from a revised 1.5% in February to 1.4%. Core index excluding fresh food and energy fell from 2.5% to 2.3%, the lowest growth rate in 13 months, and is a key reference indicator for the Bank of Japan to gauge potential inflation.
This cooling largely reflects a narrowing rise in processed food prices, with March growth slowing from last month's 5.5% to 4.9%.
In terms of energy, overall energy prices fell 7.5% year-on-year, a slightly narrower decline than February's 9.2%. Gasoline prices fell significantly from February's 14.7% to 1.0%. Japanese statistical data collection time is about mid-March, when the situation had just begun to influence oil prices upwards.
Service prices maintained a year-on-year increase of 1.5%, while rice prices dropped sharply from last month's 18.2% rise to 8.3%.
Japan’s ongoing cooling of inflation is also closely related to government policy measures by Sanae Takaichi to control utility and food prices. Analysts expect that, in the face of Middle Eastern energy price shocks, the Japanese government will maintain relevant subsidy measures in the near future.
Middle East Situation Plants Hidden Dangers for Inflation Rebound
Despite the current soft data, many warn that subsequent inflation trends face significant upside risks.
Kohei Okazaki, Chief Market Economist at Nomura Securities, stated:
The impact from the Middle East situation will gradually emerge, and if international oil prices maintain current levels, overall inflation may rise to the 2.5%-3% range in the second half of this year.
Kohei Okazaki added:
If the yen weakens further, there may even be moments exceeding 3% in the second half.
The Bank of Japan has previously forecast periodic cooling of inflation, and expects that as the effects of government subsidies are gradually digested and wages rise further, inflation will rebound within the year. The central bank has clearly marked the subsequent rate hike path in its policy statement, with the next policy meeting scheduled for April 28.
Teikoku Databank reported Tuesday that food and beverage companies will raise prices on nearly 2,800 products in April, the largest scale since last October.
Another report from the agency shows that more than 1,500 Japanese companies operate in the Middle East, facing direct risks of supply chain disruption and rising raw material costs, involving various imported products such as marble, fish feed, lubricants, etc.
Other Economic Data Shows Weaker Domestic Demand
Other economic data released Tuesday further highlight the pressures facing Japan's domestic demand.
Data show Japan’s industrial output fell 2.1% month-on-month in February, slightly worse than the market expectation of 2.0%; year-on-year growth was only 0.3%. Manufacturers expect output to rebound 3.8% month-on-month in March and grow further by 3.3% in April, but Kohei Okazaki pointed out:
The base date for these forecasts was March 10, so the impact of the Middle East situation has not been fully reflected.
The consumption side is also weak. Retail sales in February fell 2.0% month-on-month and slipped 0.2% year-on-year.
The job market remains resilient. Ministry of Health, Labour and Welfare data show that Japan's unemployment rate edged down to 2.6% in February, while the job-to-applicant ratio rose slightly to 1.19, meaning 119 job vacancies for every 100 job seekers.
The persistently tight labor market provides support for wage growth, which is also one of the key reasons the Bank of Japan maintains its rate hike expectations.
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