Government figures released on Tuesday indicated that Japanese consumer inflation dropped to 2.0 percent in January, the third consecutive month.
The Bank of Japan’s tight hold on bond yields and its use of negative interest rates are expected to be abandoned in the wake of this reading.
With the exception of prices for perishable fresh food, the fourth-largest economy in the world saw an increase in prices year over year in December of 2.3 percent.
The dip in the core consumer price index (CPI) was slightly less pronounced than expected, with economists polled by Bloomberg predicting 1.9 percent.
But the reading continued a broad trend of cooling inflation over the past year.
The last time CPI stood below the Bank of Japan’s two percent inflation target was in March 2022, when prices rose 0.8 percent year-on-year.
Since then, inflation had increased to as high as 4.2 percent in January 2023 before gradually easing to 2.3 percent in December.
Unlike other major central banks that have raised interest rates and may soon begin easing them again the BoJ has stuck to its ultra-loose policy.
This has put pressure on the yen.
The BoJ prefers to see a “virtuous cycle” of price increases driven by demand and rising salaries rather than the present inflation in Japan, which it believes is caused by transient factors like rising energy costs.
Last month, the BoJ remained unchanged, with its governor, Kazuo Ueda, indicating that a significant departure from its extremely lax position was not anticipated.
“Even if… hypothetically, the negative interest rate were lifted, we can say that the extremely easy financial environment will continue for the time being,” he told reporters after a two-day policy meeting.
Japan’s economy shrank an adjusted 0.1 percent quarter-on-quarter in the last three months of 2023, missing market expectations of 0.2 percent growth, according to government data released earlier this month.
Growth for the third quarter was also revised downward to negative 0.8 percent, meaning that Japan was in technical recession in the second half of 2023.
“We continue to expect the BoJ to end current (monetary easing) … policy framework, which includes negative interest rate policy” in the bank’s April meeting, said UBS economists Masamichi Adachi and Go Kurihara in a report released ahead of the inflation figures.
“Although CPI inflation is slowing and the growth picture is rather weak, we believe the BoJ is forward looking and the Bank is more optimistic on both growth and underlying inflation,” they said.
“We expect real wages will increase with wage growth acceleration and slower CPI inflation.”
