Japanese Inflation Decelerates in December Amid Lower Energy Costs

Japanese consumer inflation showed a slowdown in December, primarily influenced by reduced electricity and gas expenses, as per government data released on Friday. This development comes ahead of the Bank of Japan’s policy decision scheduled for the upcoming week.

In the world’s third-largest economy, excluding the impact of volatile fresh food prices, the year-on-year inflation rate in December was 2.3%, down from the previous month’s 2.5%. This aligns with market expectations and continues the trend of declining inflation observed over the past year, compared to the 4.2% recorded in January 2023.

Despite inflation remaining above the Bank of Japan’s longstanding two-percent target, there is a widespread anticipation that the central bank will maintain its current monetary easing measures in the upcoming meeting.

In contrast to other major central banks that have opted for interest rate hikes, the Bank of Japan has adhered to its ultra-loose policy, placing downward pressure on the yen. In the preceding month, the Bank of Japan maintained its policy stance, offering no specific guidance for the new year, leading to a depreciation of the yen against the dollar and an uptick in stock values.

Speculation had circulated for weeks regarding a potential shift in the bank’s policies, especially concerning negative interest rates and strict control over bond yields, given the rise in prices above the two-percent threshold. However, it is now considered less likely that the Bank of Japan will make any policy adjustments following the recent earthquake in central Japan on January 1.

As unions gear up for annual spring wage negotiations, the Japan Business Federation has encouraged its members to propose higher salary increases compared to the previous year. Achieving sustained inflation in Japan necessitates simultaneous increases in both wages and prices, according to Nobuko Kobayashi, the Asia-Pacific strategy execution leader at consulting firm EY.

The data released on Friday indicated that the current price increases are driven by external factors like global inflation, while prolonged productivity increases, challenging in a nation experiencing demographic shrinkage, are essential for sustaining wage growth.

When fresh food and energy components are excluded, Japan’s prices showed a 3.7% rise, in line with expectations. The Japanese currency, which dipped to nearly 152 yen against the dollar in late October, has gradually strengthened amid speculation that the Bank of Japan might tighten its policies. The interest rate gap between Japan and the United States is also a contributing factor, with expectations that it will narrow as the US Federal Reserve signals a potential rate cut next year after maintaining rates steady to combat inflation.

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