Introduction
Japan’s core consumer price index (CPI) inflation eased in November, raising doubts about the Bank of Japan’s (BOJ) plans to tighten its ultra-loose policy. The core CPI, which excludes volatile fresh food prices, rose by 2.5% year-on-year, in line with expectations but slower than the previous month’s reading of 2.9%. This marked the slowest pace of growth since August 2022, with month-on-month core inflation remaining static. However, core inflation continued to exceed the BOJ’s annual target of 2%.
Concerns Over Policy Tightening
The BOJ considers a core reading that excludes both fresh food and fuel prices, and this reading also indicated a slowdown in underlying inflation. The year-on-year growth rate for this measurement decreased from 4% to 3.8% in November. These figures raise questions about whether persistent inflation will prompt the BOJ to initiate policy tightening sooner than anticipated. The central bank did not provide any clear indications of a policy pivot during its final meeting of 2023.
Impact of Economic Factors
Japan’s headline CPI inflation also experienced a slowdown, growing at a rate of 2.8% year-on-year in November, compared to 3.3% in the previous month. This decline can be attributed to several economic factors, including a contraction in exports due to a slowdown in China and ongoing contraction in the country’s manufacturing activity.
Uncertain Timing for Policy Pivot
While it is expected that the BOJ will eventually transition away from its ultra-dovish stance in 2024, the timing of such a pivot remains unclear. BOJ officials have refrained from providing any significant information on the matter. The central bank recently indicated that Japanese inflation will experience a slight decrease in the near future but is projected to remain above the 2% annual target for fiscal year 2024. As a result, uncertainties persist regarding when the BOJ will tighten its monetary policy.