Japan’s core consumer price index (CPI) inflation eased in November as food prices softened, raising questions about when the Bank of Japan (BOJ) will begin tightening its ultra-loose policy. The latest data from the Statistics Bureau revealed that core CPI inflation, excluding volatile fresh food prices, rose 2.5% year-on-year, in line with analyst expectations but slower than the previous month’s 2.9%. It was also the slowest pace since August 2022, with month-on-month growth in core inflation remaining static.
Despite remaining above the BOJ’s annual 2% target, it is unclear whether sticky inflation will push the central bank into an early policy tightening. During its final meeting of 2023, the BOJ provided few clues regarding a policy pivot. Meanwhile, a core reading that excludes both fresh food and fuel prices, which is closely monitored by the BOJ, slowed to 3.8% year-on-year from the previous month’s 4%, indicating a decrease in underlying inflation.
Headline CPI inflation in November expanded at a slower rate of 2.8% year-on-year compared to the previous month’s 3.3%. A drop in food and energy prices contributed to the softer inflation reading.
These inflation figures come amidst a cooling Japanese economy, with consumer and capital spending experiencing a slowdown in recent months due to global market headwinds. Earlier data showed that Japan’s exports contracted for the first time in three months, primarily due to a slowdown in China. Meanwhile, manufacturing activity in the country remained in contraction.
The Japanese economy also shrank more than expected in the third quarter, providing justification for the BOJ to maintain its loose policy stance in the near term. While a pivot away from ultra-dovish policies is expected in 2024, the timing remains uncertain, as BOJ officials have been tight-lipped on the matter.
Notably, the BOJ recently indicated that Japanese inflation is projected to trend slightly lower in the near term, but it is expected to remain above the 2% annual target for fiscal 2024. The central bank emphasized the need for more signs of inflation reaching the 2% level before considering an end to its ultra-dovish policies.
In summary, Japan’s core CPI inflation eased in November as food prices softened, raising doubts about when the BOJ will begin tightening its ultra-loose policy. While core inflation remains above the target, it remains uncertain whether this will lead to an early policy pivot. The Japanese economy has experienced cooling, with a contraction in exports and manufacturing activity. The BOJ is closely monitoring inflation and expects it to remain above the 2% target for fiscal 2024.
