Japan's main inflation number cooled off to a two-year low in January. It hit right on the Bank of Japan's 2% target, and this makes the timing for more interest-rate hikes even more uncertain than it already was for the central bank.
New data from the government that came out Friday showed that core consumer prices, if you do not count fresh food which jumps around a lot, went up 2.0% from the year before in January. That is down from 2.4% in December, and it is what people were expecting.
Most of the change was because fuel costs are down. Also, government subsidies, and things evening out after food prices shot way up last year had an impact.
This lower number shows how Japan's inflation is being pulled in different directions, just when the people in charge are thinking about when to raise interest rates, after they stopped their super-easy money policy that lasted for ten years. It is a tough call.
Even with the main number down, some price pressures remained.
A smaller inflation number that the BOJ looks at closely, that does not include fresh food or fuel, also went down a bit. But it was still much higher than the target, at 2.6% compared to last year. That is less than the 2.9% in December.
What this suggests is that prices are still going up on their own, because wages are pretty steady. So even though the main inflation number is not as high, things have not totally stopped.
Services inflation was the same as before, at 1.4%, although price increases regarding private-sector services slowed to 1.9% from 2%, and it hints that firms are still cautious about passing higher labour costs along to consumers.
Taken together, overall consumer inflation slowed sharply to 1.5% in January from 2.1% the month before, dipping below the BOJ's target for the first time in nearly four years. That development complicates the central bank's communication, challenges as it really seeks to normalise policy without derailing fragile growth.
Policy dilemma deepens
The BOJ has repeatedly argued that temporary factors, like fuel subsidies, and tax adjustments, could push inflation below target during the short term, officials insist. Its policy focus remains on whether Japan can sustain wage-led, demand-driven inflation around 2%. Or not.
"With price pressures showing signs of softening, the Bank of Japan will not be in a rush to resume it is hiking cycle," said Abhijit Surya, senior Asia-Pacific economist at Capital Economics.
Recent economic signals have been kind of mixed. Japan's economy barely expanded in the final quarter of last year, yet exports have strengthened and business sentiment among manufacturers has improved early, this year.
(With inputs from agencies)
