Government data released on Tuesday revealed that Japanese consumer inflation slowed for the third consecutive month to 2.0 percent in January. The dip in the core Consumer Price Index (CPI), excluding volatile fresh food prices, follows a December increase of 2.3 percent. While slightly higher than economists’ expectations of 1.9 percent, the reading continues a broader trend of cooling inflation over the past year.
The Bank of Japan (BOJ), facing speculation about its policy stance, has maintained ultra-loose policies, including negative interest rates. Despite the slowdown in inflation, BOJ Governor Kazuo Ueda indicated last month that a major shift away from their ultra-loose stance was not imminent. The central bank attributes Japan’s current inflation to temporary factors, such as increased energy costs, and aims to see a “virtuous cycle” of sustained price increases driven by demand and higher wages.
Japan’s economy recently contracted by 0.1 percent in the last quarter of 2023, missing expectations for growth. With the revised negative growth in the third quarter, Japan officially entered a technical recession in the second half of 2023.
UBS economists Masamichi Adachi and Go Kurihara anticipate the BOJ to end its current monetary easing policy framework, including negative interest rates, in the bank’s April meeting. Despite slowing CPI inflation and weak growth, they believe the BOJ is forward-looking and optimistic about both growth and underlying inflation, expecting an increase in real wages with accelerating wage growth.
