Home Traditional Finance Economy Tokyo Inflation Cools for Second Straight Month, But Remains Above BOJ Target

Tokyo Inflation Cools for Second Straight Month, But Remains Above BOJ Target

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Tokyo inflation

Core consumer inflation in Tokyo, Japan slowed for the second consecutive month in March. However, the data still showed that inflation remained significantly above the central bank’s 2% target. The slowing inflation rate indicates that recent cost-driven inflation could shift to one backed by solid demand and wage growth. Nonetheless, uncertainties cloud Japan’s fragile economy, presenting a challenge for incoming Bank of Japan Governor Kazuo Ueda.

Energy Price Subsidies Had Little Impact on Living Costs

The data showed that a separate index, which stripped away energy prices, had increased at the fastest year-on-year pace since 1990. This indicates that government subsidies to curb utility bills did little to stem the rising cost of living for households. This presents a significant challenge for policymakers as they try to strike a balance between supporting households’ purchasing power while promoting economic growth.

Mounting Downside Risks for Japanese Exports

While factory output rebounded in February, some analysts warn of mounting downside risks as slumping global demand for technology goods hits the country’s exports. With export volumes expected to record the sharpest contraction since the initial outbreak of the pandemic, GDP will likely contract in the first quarter and again in Q2. This presents a significant challenge for the Japanese economy, which is finally recovering from the scars of the COVID-19 pandemic after a delay.

Consumer Price Index

Core Consumer Prices in Tokyo Exceed Median Market Forecast

Core consumer prices in Tokyo, which are a leading indicator of nationwide trends, rose 3.2% in March from a year earlier. This exceeded the median market forecast for a 3.1% gain. Although the pace of increase slowed from a 3.3% gain in February and a nearly 42-year high of 4.3% hit in January, it still indicates broadening price pressures in Japan’s economy.

Food Prices Set to Rise in April

The prices of more than 5,100 food items are set to rise in April, according to a report by Teikoku Databank. The report indicates that grocery price hikes would likely persist until around October, presenting another challenge for households as they weather the rising cost of living.

Retail Sales Beat Market Forecasts

Despite the rising cost of living, data released on Friday showed retail sales rose 6.6% in February from a year earlier, beating market forecasts for a 5.8% gain. Solid sales at car dealers and department stores were the primary drivers of this growth.

Factory Output Rose 4.5% in February from January

Separately, factory output rose 4.5% in February from January, better than a forecast 2.7% gain. The rebound was due to easing supply bottlenecks for carmakers. While manufacturers surveyed by the government expect to increase output in coming months, some analysts warned of risks due to weaknesses in the information-technology sector.

Outlook for Japan’s Economy

Japan’s economy is recovering from the scars of the COVID-19 pandemic, but risks of a global slowdown and rising food prices hang over the outlook for exports and consumption. With inflation already exceeding its target, markets are rife with speculation that the BOJ could tweak or end yield curve control (YCC) when Ueda succeeds incumbent Haruhiko Kuroda, whose second, five-year term ends in April. Given the uncertainty over the global economic outlook, the BOJ may sustain ultra-loose policy, but there’s a chance it will change the means of keeping monetary policy loose, such as by tweaking YCC.

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