Japan’s consumer inflation has surged to its fastest pace in four months, signaling a potential interest rate hike by the Bank of Japan later this year. In February, consumer prices excluding fresh food rose by 2.8% compared to the previous year, accelerating from January’s 2%, according to the Ministry of Internal Affairs.
The recent inflation spike is partly due to base effects following utility subsidies that suppressed prices in 2023, mirroring earlier data for the Tokyo region. This marks the 23rd consecutive month that consumer inflation, excluding fresh food, has met or exceeded the BOJ’s target.
However, a key indicator of underlying price trends, which excludes fresh food and energy prices, slowed slightly to 3.2%, slightly below the consensus estimate of 3.3%. Services prices increased by 2.2%, consistent with the previous month.
Governor Kazuo Ueda emphasized the importance of monitoring service prices, hinting at the significance of slow-moving service costs. The decision to end the negative interest rate reflects concerns about delaying actions that could significantly boost inflationary pressures, potentially necessitating rapid rate increases.
Despite pockets of weakness in consumer demand, such as falling household spending and a softer private consumption component in GDP reports, wage trends suggest a potential turnaround. Japan’s major labor union group announced substantial wage gains for the upcoming fiscal year, likely boosting consumer confidence and spending.
The report also highlights factors influencing price growth, including smaller declines in energy prices and accelerated cost increases in hotels and inns.
However, slower growth in processed food prices and the yen’s historic low against the dollar could temper inflationary pressures.
Overall, economists anticipate a positive trajectory for real wages and consumer spending, with expectations of a potential interest rate hike by the BOJ later in the year if the yen remains weak and import costs continue to rise, potentially fueling inflationary risks.
