Today: 16-04-2024

Rising Japanese Inflation Signals Shift in BOJ Strategy

Japanese Inflation Inches Up, Fueling Speculation of BOJ Policy Shift

TOKYO, Nov 24 (Reuters) — Japan's core consumer price growth showed a slight uptick in October, bouncing back from a recent dip and adding weight to the belief among investors that the Bank of Japan (BOJ) might consider scaling back monetary stimulus in the near future. Government data released on Friday revealed that the nationwide core consumer price index (CPI), excluding volatile fresh food costs, rose 2.9% year-on-year in October, just below the 3.0% expected by economists in a Reuters poll. This comes after core inflation had decelerated to 2.8% in September from 3.1% in August, marking the first time it had fallen below 3% since August 2022.

Despite 19 consecutive months of inflation above the central bank's 2% target, the BOJ attributes these cost pressures primarily to higher global commodity prices and a weaker yen, downplaying signs of sustained price increases driven by robust domestic demand and wage growth. Some analysts, however, anticipate a shift in BOJ policy, with Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities, predicting a potential end to negative interest rates and the removal of yield control by April.

The core-core index, a narrower gauge excluding fresh food and fuel costs, rose 4.0% in the year to October, moderating from a 4.2% gain in September but maintaining a seven-month streak above 4.0%. As inflation proves more persistent than anticipated, speculation grows that the BOJ may abandon its negative interest rate policy and yield curve control, which caps the 10-year bond yield at 0%.

While the BOJ dismisses such speculation, emphasizing the transitory nature of current global cost-push inflation, analysts argue for a reevaluation of policy in light of evolving economic conditions. The upcoming two-day policy meeting ending on Dec. 19 will be closely watched for indications of the BOJ's stance on policy adjustments amid persistent inflationary pressures. Concurrently, the government is urging companies to raise wages to counter higher living costs for employees.

In conclusion, Japan's recent uptick in core consumer price growth, though slightly below expectations, has intensified speculation about the Bank of Japan's (BOJ) future monetary policy decisions. The persistent inflationary pressures, with core inflation above the central bank's 2% target for 19 consecutive months, have prompted discussions about the potential need for the BOJ to reevaluate its stance.

While the BOJ attributes the inflation to global factors like higher commodity prices and a weaker yen, analysts foresee a shift in policy, with predictions ranging from the end of negative interest rates to a possible abandonment of yield curve control. This speculation is fueled by the recognition that inflationary trends are proving more stubborn than initially anticipated.

The upcoming two-day policy meeting ending on Dec. 19 is expected to be a pivotal moment for insights into the BOJ's considerations regarding policy adjustments. Concurrently, the government's encouragement for companies to raise wages as a response to higher living costs adds another layer of complexity to the economic landscape.

As Japan navigates these economic challenges, the trajectory of inflation and the BOJ's response will likely have broader implications for the country's economic recovery. The interplay between global economic dynamics and domestic policies will continue to shape the narrative around Japan's inflation and the measures taken to address it.