The fastest annual increase in nearly 42 years was seen in the capital city of Japan, where core consumer prices (CPI) are a leading indicator of national trends. This puts pressure on the central bank to gradually reduce economic assistance.
The data increases the likelihood that inflation will remain well above the Bank of Japan’s (BOJ) 2% target in the coming months as companies continue to steadily pass on rising costs to households. Although, the government’s energy subsidies beginning next month will probably moderate price gains from February.
The increase in the CPI for Tokyo, which includes fuel but excludes fresh food, was higher than the median market expectation of a 4.2% increase and was the fastest since May 1981. It came after a 3.9% increase in December and continued to rise for an eighth consecutive month, figures on Friday revealed.
Following the announcement of the statistics, the yen and yield on the 10-year Japanese government bond (JGB) increased, reflecting market views that rising inflation may prompt the BOJ to reduce stimulus soon.
The BOJ closely monitors an index for Tokyo that excludes the cost of fuel and fresh food as a sign of pricing pressure brought on by domestic demand. It increased by 3.0% in January compared to a year earlier, up from a gain of 2.7% in December.
According to Japanese Prime Minister Fumio Kishida, they cannot rule out a return to deflation. This is because domestic demand is still subpar.
The statement was made just after statistics showed that consumer inflation in Tokyo. A key barometer of Japanese price trends, had reached a 42-year high in January. Adding to pressure on the central bank to terminate its loose monetary policy gradually.
When asked if the Japanese economy had fully recovered from years of deflation. An opposition politician posed the question to Kishida. Who responded, “the state of non-deflation is going on at the moment, but it has not reached a stage where we can evaluate that the return (to deflation) is unlikely.”
Last month, the Bank of Japan stunned the financial markets by allowing 10-year bond yields to fluctuate in a wider range at just above or below zero. This move sparked speculation that the BOJ was laying the groundwork for a gradual end to its ultra-loose monetary policy.
Kishida, though, characterized the action as an operational adjustment made to mitigate the effects of monetary easing distorting the nation’s bond markets. At its meeting in mid-January, the BOJ made no more adjustments. Policymakers hope pay rises will offset rising living expenses and promote consumer spending this spring.
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