Japan CPI: The BoJ Faces A Tough Decision Ahead

Another inflation figure not seen in four decades amid rising turmoil. Annual inflation in Japan rose by 0.2% to a record 4.0 % in December 2022, the highest since January 1991, following a rise in the price of imports and a weakening local currency.


Cost-push factors came from all components with the major contributors being electricity (21.3% vs 20.1%), gas (23.3% vs 21.0%), fuel, light, and water charges (15.2% vs 14.1%). Core consumer prices also increased matching the market’s expectation of 4.0% YoY, the most since December 1981 (figure 1).


Headline CPI is expected to rise further to 4.1% in January and remain elevated during Q1 2023, only expected to fall below the 2% threshold in 2024.


Yoshiki Shinke, an economist at Dai-ichi Life Research Institute told CNN: “Companies aren’t that cautious about raising prices anymore. We might see inflation stay above the BOJ’s 2% target well into autumn this year.”


Japan Core Inflation

Figure 1: Japan Core Inflation which excludes fresh food (1970-2023) based on the Statistics Bureau of Japan from TradingEconomics.com


The BoJ governor has a tough decision between tightening monetary policy and damaging an already slowing economy in which Q4 preliminary GDP recorded 0.2%, significantly below the market’s expectations of 0.5%.  The market expects a new era for Japan of gradual tightening policy under the new leadership once its Parliament approves. It is also expected that the BoJ will decrease the yield curve control, capping long-term interest rates around zero during Q2 of this year.


Japan’s newly elected BoJ governor, Kazuo Ueda, could introduce a slate of measures during the second quarter of this year to control soaring prices, if the transition is complete by early April.








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