Inflation Decelerates in Tokyo, Yet Lingering Economic Pressures Remain

29 Sep, 2023

Inflation Decelerates in Tokyo, Yet Lingering Economic Pressures Remain

Core inflation in Tokyo's capital city has seen its third consecutive monthly slowdown in September, primarily driven by declining fuel costs, according to data released on Friday. This trend indicates that the pressures stemming from rising costs are starting to ease, providing some relief to the delicate economic recovery. However, separate data reveals that factory output remained stagnant in August, signaling that businesses are grappling with the impacts of subdued global demand and the economic challenges in China.

In September, the Tokyo core consumer price index (CPI), excluding the volatile fresh food component but including fuel costs, recorded a 2.5 percent increase compared to the previous year. This figure slightly missed the median market forecast of a 2.6 percent gain and marked a deceleration from the 2.8 percent rise observed in August. Nonetheless, it continued to surpass the Bank of Japan's 2 percent target for the 16th consecutive month. Another significant indicator, which removes both fresh food and fuel costs and is closely monitored by the BOJ to gauge broader price trends, demonstrated a 3.8 percent increase in September year-on-year, following a 4.0 percent gain in August.

While inflation is indeed slowing, persistent increases in food, everyday necessities, and service prices are anticipated to keep the Bank of Japan under pressure to gradually reduce its extensive stimulus measures, as noted by analysts. Marcel Thieliant, Head of Asia-Pacific at Capital Economics, commented, "Even though inflation is now moderating, it is doing so less quickly than the Bank of Japan had anticipated. Consequently, the Board will find it necessary to raise their inflation forecast for the ongoing fiscal year even more during their upcoming meeting in October. Our perspective is that the Bank will seize the present opportunity to phase out negative interest rates, and we have scheduled a rate increase for January next year.

Last year, a surge in global commodity prices compelled many Japanese companies to reconsider their reluctance to raise prices, passing on higher costs to households and prolonging inflation above the BOJ's target for a more extended period than initially projected. The overshoot in inflation prompted the BOJ to make slight adjustments to its bond yield control policy last month, a move that investors interpreted as a shift away from the decades-long ultra-loose monetary policy.

Nevertheless, Governor Kazuo Ueda has dismissed the possibility of an early exit from the ultra-loose policy, emphasizing the need to wait until wages rise sufficiently to maintain sustainable inflation around 2 percent. Underlining the fragile nature of Japan's export-dependent economy, the data showed that factory output remained stagnant in August, particularly in the production of automobiles, steel goods, and machinery. Manufacturers surveyed by the Ministry of Economy, Trade and Industry expect output to increase by 5.8 percent in September and by 3.8 percent in October.