Inflation in Japan’s capital slows even better than expected

TOKYO (Reuters): Core inflation in Japan’s capital slowed in November, underscoring the central bank’s view that cost-push pressures in the world’s third-largest economy will gradually dissipate.

While service prices – in focus as the central bank looks for signs of wage-driven inflation – marked their fastest pace of increase since 1994, analysts attributed the climb to a spike in hotel fees amid an influx of tourists.

The core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, for Tokyo rose 2.3 per cent in November from a year earlier, government data showed on Tuesday, slightly below a median market forecast for a 2.4pc gain.

It was slower than the 2.7pc increase in October and matched a low marked in July last year, as fuel costs kept falling and food price hikes moderated, the data showed.

The Tokyo index is considered a leading indicator of nationwide trends.

The so-called “core core” index that strips away both fresh food and fuel prices – closely watched by the BOJ as a gauge of broader price trends – rose 3.6% in November, slowing from a 3.8pc gain in October.

The data will be among factors the BOJ will scrutinise at its next policy-setting meeting on Dec 18-19.

With inflation having exceeded the BOJ’s 2pc inflation target for more than a year, many market players expect the bank to phase out its massive stimulus sometime next year.

BOJ Governor Kazuo Ueda has stressed the need to keep policy ultra-loose until recent cost-push inflation is replaced by a demand-driven increase in prices backed by solid wage gains.

He has also said next year’s annual wage negotiations and the outlook for service prices, which reflect labour costs, are key to determining how soon the BOJ can exit its ultra-easy policy.

Slowing global growth and lacklustre domestic consumption have cast a shadow over a potential BOJ exit. Japan’s economy contracted in July-September, snapping two straight quarters of expansion on soft consumption and exports.

Service prices rose 3.0pc in November, the Tokyo CPI data showed.

But the increase was due largely to a 62.5pc jump in hotel fees, which were inflated by the base effect of a fall last year and pent-up demand for travel after the removal of pandemic curbs, analysts say.

“We expect not just goods but service prices to come under dis-inflationary pressure,” said Toru Suehiro, chief economist at Daiwa Securities.

The BOJ remains a dovish outlier among global peers, having maintained ultra-loose policy even as major central banks elsewhere raised interest rates aggressively to fight rampant inflation.

“Wage growth has yet to catch up to inflation, which is why inflationary pressure is gradually weakening,” said Takuya Hoshino, chief economist at Dai-ichi Life Research Institute.

“With the economy starting to show signs of weakness, it’s hard to assume the BOJ can proceed smoothly towards normalising ultra-loose policy.”