Tokyo’s core inflation decelerated in March, and factory output unexpectedly declined in the previous month, casting uncertainty over the Bank of Japan’s (BOJ) timeline for future interest rate hikes following its departure from radical monetary stimulus measures. The recent string of economic indicators indicating weakness may compel the central bank to adopt a cautious approach in its next interest rate adjustment. This cautious stance could provide investors with a rationale to continue selling the yen, increasing pressure on Japanese authorities to intervene in currency markets to support the yen’s value. Masato Koike, an economist at Sompo Institute Plus, noted the unexpected weakness in factory output, suggesting that the BOJ might face challenges in raising interest rates promptly given the subdued production levels. In terms of inflation, Tokyo’s core consumer price index (CPI), an early indicator for national inflation trends, rose by 2.4% in March compared to the previous year, aligning with market expectations. However, this marked a slight slowdown from the 2.5% growth observed in February. Similarly, an index excluding fresh food and fuel costs, considered a broader measure of price trends, also exhibited a deceleration, with inflation easing to 2.9% in March from 3.1% in February. While core inflation remains above the BOJ’s 2% target, the deceleration underscores that price pressures primarily stem from raw material costs rather than robust domestic demand. Toru Suehiro, chief economist at Daiwa Securities, highlighted the weakening cost-push inflationary pressures and a slowdown in service-sector inflation. Further data revealed that Japan’s factory output unexpectedly contracted by 0.1% in February compared to the previous month, contrary to market expectations of a 1.4% increase. Manufacturers surveyed by the Ministry of Economy, Trade, and Industry projected a 4.9% output growth in March and a 3.3% rise in April. These economic indicators may prompt caution at the BOJ regarding additional interest rate hikes following the recent cessation of an eight-year negative interest rate policy. Despite this policy change, market expectations of a gradual rate hike approach have driven the yen to a 34-year low against the dollar, leading to verbal warnings from authorities against excessive currency devaluation. While a weaker yen benefits Japanese exporters by boosting profits, it poses challenges for households and retailers due to increased costs of importing raw materials and fuel. The BOJ’s decision to end negative rates stemmed from indications of robust demand and potential wage increases, driving firms to raise prices for goods and services. BOJ Governor Kazuo Ueda indicated the possibility of future rate hikes if inflation surpasses expectations or if upside risks to price outlooks significantly increase. Notably, substantial pay raises in this year’s wage negotiations among major firms raise the prospect of sustained inflation around the BOJ’s 2% target. However, concerns persist about weakened consumption amid rising living costs, impacting household finances and casting doubts on Japan’s economic resilience. Furthermore, ongoing production and shipment disruptions at Toyota Motor and its small-car unit contribute to lingering weakness in factory output, potentially affecting Japan’s broader manufacturing sector and economic performance. Despite these challenges, Japan’s economy managed to expand by an annualized 0.4% in the final quarter of the previous year, narrowly avoiding a technical recession, primarily due to robust capital expenditure offsetting consumption weaknesses.
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