Tokyo's inflation eases, Japan's interest rate hike expectations cool

Weaker-than-expected Japanese inflation has doused expectations for interest rate hikes by the Bank of Japan.

On February 28, the Ministry of Internal Affairs and Communications of Japan released the Tokyo CPI data for February:

Tokyo's CPI in February rose 2.9% year-on-year, below the expected 3.2%, still significantly higher than the Bank of Japan's inflation target of 2%.

Tokyo's CPI (excluding fresh food) rose 2.2% year-on-year, below the expected 2.3%.

Tokyo's CPI (excluding fresh food and energy) rose 1.9% year-on-year, below the expected 2.0%.

Price trends in the Tokyo area are typically seen as a leading indicator of national inflation trends in Japan. Following the data release, market expectations for interest rate hikes by the Bank of Japan quickly cooled, with the USD/JPY rising over 40 points in the short term to around 150.15, before retreating to 149.21.

Complex Economic Data

Today, the Japanese government also released data showing that retail sales in January increased by 3.9% year-on-year, reflecting consumer resilience. The government hopes to create a virtuous cycle by raising wage levels to promote consumer spending and maintain moderate inflation.

Meanwhile, industrial production showed signs of weakness. Industrial production in January fell by 1.1% month-on-month, a larger decline than December's 0.2%, marking a third consecutive month of decline.

Due to a slowdown in production during the Chinese New Year, Japan's industrial output data was affected to some extent. According to Reuters, Japanese companies expect a 5.0% increase in output in February, but a further decline of 2.0% is anticipated in March.

Bank of Japan May Be More Cautious on Rate Hikes

In January, the Bank of Japan raised interest rates by 25 basis points to 0.50%, marking the largest increase in eighteen years. In recent weeks, as Japanese economic data has shown continued recovery, market expectations for the Bank of Japan to accelerate interest rate hikes have been rising. Today, Bank of Japan Deputy Governor Masayoshi Amamiya reiterated in a parliamentary meeting:

If the economic and price outlook is realized, we will continue to raise rates. We do not comment on the daily levels and fluctuations of Japanese government bond yields, although there have been recent yield fluctuations, the stance on short-term policy interest rates and the plan to reduce Japanese government bonds remain unchanged.

Although this slowdown in inflation is mainly due to the Japanese government's reimplementation of electricity and gas bill subsidy policies, leading to a decline in energy price growth, the market generally believes that the Bank of Japan will be more cautious in its further interest rate hike decisions to assess the sustainability of inflation and the state of economic recovery