BOJ May Raise Rates as Early as April Despite Softer Inflation
The Bank of Japan (BOJ) could move ahead with an interest rate hike as soon as April, even though recent inflation data has weakened. Analysts at ING suggest that underlying price pressures remain strong enough to justify tighter monetary policy.
Headline Inflation Slows on Subsidies
Japan’s consumer price inflation eased to 1.3% year-on-year in February, down from 1.5% in January. The slowdown was mainly driven by lower fresh food and utility prices, partly due to government subsidies.
Core Inflation Signals Persistent Pressure
Despite the softer headline figures, policymakers are expected to focus on deeper inflation trends. Core-core inflation, which excludes both food and energy, remained elevated at 2.5%, staying above the BOJ’s 2% target.
Analysts believe this indicates that underlying inflation remains resilient, even as short-term factors temporarily suppress headline numbers.
Strong Wage Growth Supports Inflation Outlook
Wage growth continues to provide support for inflation in Japan. The country’s largest labor union group recently reported an average pay increase of 5.26%, reinforcing expectations of sustained domestic demand.
Business Activity Remains in Expansion
Economic activity in Japan has shown some moderation but remains in expansion territory. Preliminary data for March showed the manufacturing PMI at 51.4 and services PMI at 52.8, both indicating continued growth.
Rate Hike Timing Could Shift to April
According to ING, the combination of persistent underlying inflation, solid wage gains, and steady business activity increases the likelihood of a near-term rate hike. April is now seen as slightly more probable than June for the next policy move.
External Risks Still in Focus
However, the timing of any rate hike will depend on external factors, particularly geopolitical developments in the Middle East and their potential impact on global growth and inflation.
