Slowing Japanese inflation gives the BoJ room to maneuver

Unlock Editor’s Digest for free

Data released today for Japan shows inflation is no stickier or more persistent than expected, making a surprise BoJ rate hike unlikely in June.

In April, Japan’s overall annual CPI rose 2.5 percent, a deceleration from the 2.7 percent rate recorded in March.

Core inflation, which excludes food but not energy, slowed to 2.2 percent from 2.6 percent in March, in line with expectations.

Services inflation, a gauge of domestic inflationary pressures, slowed to 1.7 percent in April from 2.1 percent in March.

The yen remained broadly stable on the news, although it weakened by 0.8 percentage points during this week.

The data does not indicate that inflationary pressures are strong enough to justify an anticipated increase. We therefore continue to expect the BoJ to maintain the reference rate at the current level at the next meeting in June.

Beyond June, the BoJ will monitor indicators of economic activity and consumption, wage growth and the weakness of the yen.

Data released in recent weeks has cast doubt on the dynamics of the Japanese economy, although the BoJ will have several additional data on inflation and wage growth by July.

Last week, GDP data for the first quarter of 2024 showed that overall GDP fell 0.5 percent on a quarterly basis, worse than expectations of a 0.3 percent contraction.

Consumption underperformed even more, falling 0.7 percent from the previous quarter.

Broader measures of wages have also been weak and have yet to show any pass-through from recorded data. shunt the wage agreement reached in March on the payroll of small businesses.

However, the indicators we have so far suggest that private demand remains subdued, with wage growth too slow to encourage Japanese consumers to spend.

In recent days, the BoJ has let yields on 10-year government bonds rise above 1 percent, tightening financial conditions. We believe this is preferable in the short term to an increase in key rates.

We continue to expect the BoJ to carry out another rate hike in 2024, taking the benchmark rate to 0.1-0.2% by the end of this year.