(Bloomberg) -- Inflation in Tokyo cooled to the slowest pace in over a year, a development that supports the Bank of Japan’s view that price pressures are weakening for now and its continued caution over a tightening of policy.
Consumer prices excluding fresh food rose 2.3% in November from the prior year in the capital, largely due to falling electricity and gas charges and smaller gains in processed food prices, according to the ministry of internal affairs Tuesday. Inflation slowed from 2.7% in October, and came in below economists’ forecast of 2.4%.
Tokyo figures are a leading indicator of the national trend and suggest that the country’s price growth also moderated last month.
The data support BOJ Governor Kazuo Ueda’s view that prices are cooling, after an unexpected acceleration in the previous month. The slowdown may encourage the central bank to wait for other signs that its wage-gain-accompanied inflation target will be achieved.
“Wages are not keeping up with price hikes, resulting in slower consumption. If demand does not catch up, price increases will not continue,” said Takuya Hoshino, an economist at Dai-Ichi Life Research Institute Inc. Given the slowdown in the US economy as well, “I think the BOJ will be a bit more cautious” in revising policy, he said.
The yen briefly softened a touch against the dollar, but soon gave up the gains, suggesting the weaker result didn’t move the needle on market speculation over an early policy shift.
A deeper measure of the inflation trend that strips out fresh food and energy prices also decelerated to 3.6%, slowing steadily for the third consecutive month. Still, in a sign that price gains may still be spreading beyond cost-push momentum, service prices rose 2.3%, the fastest pace since early 1994, excluding the impact of sales tax hikes.
What Bloomberg Economics Says...
“Tokyo’s slower — and slower-than-expected — November core inflation is consistent with the Bank of Japan’s assessment that upward pressure on consumer prices is weakening. A steadier yen, combined with a higher year-earlier base, led to some relief from high imports prices.”
— Taro Kimura, economist
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Tuesday’s data showed price gains of processed food in Tokyo slowed to 6.4% in November from 7.3% in October. Utility prices also continued to sharply fall from the previous year, with gas prices sinking 18.4%. Prime Minister Fumio Kishida’s decision to keep utility subsidies in place on electricity and gas has helped reduce the overall inflation rate by 0.45 percentage point.
Meanwhile, hotel and accommodation fees jumped 62.5% from a year ago, when the government offered a generous subsidy program to support the Covid-hit industry. Demand for both domestic and inbound travel is expected to remain firm during the first winter without pandemic restrictions, likely pushing up related prices.
In the latest outlook report released in October, the BOJ revised up its projection for its key inflation gauge for the current and next fiscal years to 2.8%, meaning it sees three consecutive years of price increases exceeding the 2% target. Still, the bank set its price forecast for fiscal year 2025 at 1.7%, implying that current levels of inflation won’t last indefinitely.
“I don’t think inflation is going to keep slowing down to reach below 2%,” said Atsushi Takeda, chief economist at Itochu Research Institute. “There are inflationary pressures as a weak yen continues for longer than expected adding to higher raw material costs. The cost of hiring or retaining workers is also climbing.”
The BOJ is scheduled to hold its final meeting of the year in two weeks’ time, where the majority of central bank watchers expect no change in policy. Ahead of the gathering, Ueda recently repeated his view that there is still some distance to go before the bank can reach its sustainable inflation goal.
While there have been some encouraging signs ahead of the closely watched spring wage negotiations between companies and labor unions, real wages have continued to decline for 18 months. Nominal pay has also failed to gain much momentum so far.
“The BOJ wants to confirm whether wages are growing enough to support inflation,” Takeda said. “So a policy shift is likely to take place in April after the spring wage negotiation results come out.”
--With assistance from Toru Fujioka.
(Updates with additional details from report, economist comments)
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