The core CPI (excluding fresh food) in January 2024 was +2.0% compared to the same month last year. Although it was slightly higher than the market consensus of +1.9%, it fell for the third consecutive month and was the lowest level since March of 2022. The index excluding food and energy, which represents more fundamental price trends, also fell to 2.6% from 2.8% in the previous month. The historic rise in prices is reaching a turning point.

Since last year, wages have been increasing fast, but the year-on-year rate of increase in service prices, which tend to be influenced by wage, was +2.3% year-on-year in December 2023, the same level as November, and then it turned to a decline of +2.2% in January 2024. The Bank of Japan explains that after the rate of increase in goods prices declines, wages will push up service prices, leading to more sustained price increases and achieving the 2% price goal eventually. But it is not likely that 2% inflation goal will be achieved.

However, the Bank of Japan, which wants to make policy change in a timely manner given the upward trend in prices and wages, declares that it will achieve its 2% inflation goal as early as March and moves to cancel its negative interest rate policy. The BOJ has explained that even after the negative interest rate policy is lifted, the policy rate will remain at a level of around 0% for the time being, but if some in the financial market predict that the policy interest rate will be raised additionally relatively quickly after the declaration of achieving of 2% inflation goal by the BOJ, it is expected to cause long-term interest rates to rise and the yen to appreciate. In this way, the BOJ’s policy revision will be a turning point to reverse the recent trend of weakening yen and rising stock prices.

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  Takahide Kiuchi

  Executive Economist