Japan’s Capital Inflation Eases, Complicating BOJ Policy Exit

In Tokyo, November witnessed a slowdown in core inflation, signaling that the Bank of Japan (BOJ) may face challenges in adjusting its monetary policy. Despite a rapid rise in service prices, the fastest since 1994, due mainly to increased hotel fees and tourism, the core consumer price index (CPI) for Tokyo — which accounts for fuel but not fresh food — increased by 2.3% year-on-year, just below the expected 2.4%. This growth was less than October’s 2.7% rise and was comparable to the previous low in July, as fuel prices dropped and food price inflation cooled.

The Tokyo CPI is seen as a precursor to national trends. The adjusted index, excluding both food and fuel, went up by 3.6% in November, decelerating from October’s 3.8%. These figures are crucial for the BOJ’s assessment at its December policy meeting. Although inflation has been above the BOJ’s 2% target for over a year, the consensus is that the bank might begin to scale back its extensive stimulus program in the coming year.

BOJ Governor Kazuo Ueda has emphasized the importance of maintaining a very accommodative policy stance until inflation driven by costs shifts to inflation driven by demand and wage growth. Upcoming wage negotiations and service price trends, indicative of labor costs, will be significant in determining the timing of the BOJ’s shift away from its current policy.

Japan’s economy recently showed signs of strain, with a contraction in the third quarter of the year due to weak consumer spending and exports. This economic backdrop adds uncertainty to the BOJ’s potential policy change. Despite service prices rising by 3% in November, the increase was largely due to a surge in hotel fees, influenced by the rebound from last year’s drop and renewed demand for travel with the lifting of pandemic restrictions.

Economists like Toru Suehiro of Daiwa Securities predict a downward pressure on both goods and service prices. The BOJ remains cautious compared to global counterparts who are aggressively hiking interest rates to combat inflation. Takuya Hoshino from Dai-ichi Life Research Institute notes that wage growth has not kept pace with inflation, hinting at a gradual easing of inflationary pressures. The weakening economy complicates the BOJ’s path to normalizing its ultra-loose monetary policy.