The Bank of Japan (BOJ) is under pressure to phase out economic stimulus as core consumer prices in Japan’s capital, Tokyo, rose 4.3% in January from a year earlier, marking the fastest annual gain in nearly 42 years. The government’s energy subsidies starting next month will likely moderate price gains from February, but data shows the chance of inflation staying well above the BOJ’s 2% target in the coming months.
The rise in the Tokyo core consumer price index (CPI) exceeded a median market forecast for a 4.2% gain and marked the fastest year-on-year increase since May 1981. It followed a 3.9% rise in December and stayed above the central bank’s 2% target for an eighth straight month. The yield on the 10-year Japanese government bond (JGB) rose 1.5 points to 0.475% after the data release, reflecting market expectations that rising inflation could prod the central bank to soon dial back stimulus.
Darren Tay, Japan economist at Capital Economics, said, “These readings point squarely at a further, large increase in inflation at the national level this month. But we expect that to have been the peak. Government measures to lower energy bills will kick in next month and bring inflation down by about 1% point.”
An index for Tokyo excluding both fuel and fresh food costs, which is closely watched by the BOJ as a gauge of price pressure driven by domestic demand, was 3.0% higher in January than a year earlier, picking up from December’s 2.7% annual gain.
The data came in the wake of the International Monetary Fund’s proposal on Thursday that the BOJ allow government bond yields to rise more flexibly to lay the groundwork for a smooth exit from ultra-loose monetary policy. It also comes ahead of the BOJ’s crucial leadership transition, which some analysts say could install a new governor more keen to unwind its radical monetary stimulus than incumbent Haruhiko Kuroda is.
The BOJ kept monetary policy ultra-loose this month but raised its inflation forecasts in fresh quarterly projections, as companies continued to pass on higher raw material costs to households. Kuroda, whose term will end in April, has stressed the need to keep monetary policy ultra-loose until wages rise more, changing the recent cost-push inflation into inflation driven by robust domestic demand.
