In March, core inflation in Tokyo, Japan's capital, decelerated, while factory output unexpectedly declined in the preceding month. This has raised uncertainty regarding the timing of the Bank of Japan's next interest rate hike following its departure from its radical monetary stimulus.
The core consumer price index (CPI) in Tokyo, which serves as an early indicator of nationwide inflation, increased by 2.4% in March compared to the previous year, in line with market expectations. This growth slightly slowed from the 2.5% rise observed in February.
Additionally, a separate index that excludes the impact of fresh food and fuel costs, seen as a broader measure of price trends, also indicated a slowdown in inflation, decreasing to 2.9% in March from 3.1% in February.
Although core inflation remains above the central bank's 2% target, the deceleration highlights that inflationary pressures in Japan primarily stem from raw material costs rather than strong domestic demand.
Unexpectedly, Japan's factory output declined 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 anticipate a 4.9% increase in seasonally adjusted output for March and a 3.3% rise in April.
These data suggest a cautious approach from the Bank of Japan in implementing further interest rate hikes following the termination of its eight-year negative interest rate policy last week. The decision to end negative rates was driven by indications of robust demand and the potential for higher wages, prompting firms to continue raising prices for goods and services.
BOJ Governor Kazuo Ueda has indicated that the central bank could raise rates again if inflation surpasses expectations or if there are significant upside risks to the price outlook.
While large firms have offered substantial pay increases during this year's annual wage negotiations, there are concerns about weakening consumption as households face rising living costs, casting doubts on the strength of Japan's economy.
Moreover, factory output remains subdued due to production and shipment disruptions at Toyota Motor and its small-car unit, which could have implications for the broader economy given their significant presence in Japan's manufacturing sector.
Japan's economy expanded by an annualized 0.4% in the final quarter of last year, narrowly avoiding a technical recession, as strong capital expenditure offset weaknesses in consumption.
Paraphrasing text from "Investing" all rights reserved by the original author.
