San Francisco Frontiers - Japan inflation slows in December as energy bills drop

Prices in the world's third-largest economy, excluding volatile fresh food, rose 2.3 percent year-on-year in December, down from 2.5 percent the previous month.

The figure was in line with market expectations and continued a broad trend of cooling inflation over the past year, down from 4.2 percent in January 2023.

Although inflation remains above the Bank of Japan's longstanding two-percent target, the bank is widely expected to keep its monetary easing measures in place on Tuesday.

Unlike other major central banks that have raised interest rates, the BoJ has stuck to its ultra-loose policy, putting pressure on the yen.

The BoJ stood pat last month and offered no guidance on its plans for the new year, sending the yen down against the dollar and boosting stocks.

Speculation had been swirling for weeks that the bank would shift away from negative interest rates and a tight grip on bond yields as prices ticked above two percent.

BoJ governor Kazuo Ueda has repeatedly said that "a virtuous cycle of wages and prices" is necessary for the bank's inflation target to be achieved sustainably.

And following the deadly earthquake that slammed central Japan on January 1, the chances of a policy shift next month are now even lower, analysts say.

Unions are gearing up for annual Spring wage-hike negotiations, with the Japan Business Federation urging its members to offer higher salary increases than last year.

"For Japan to move into a period of sustained inflation, it needs both wages and prices to increase," said Nobuko Kobayashi, consulting firm EY's Asia-Pacific strategy execution leader.

"Price increases for now are driven by external factors such as global inflation," she said ahead of Friday's data release.

"And wage increases can only be sustained by prolonged productivity increases -- challenging in a nation suffering demographic shrinkage."

Stripping out fresh food and energy, Japan's prices rose 3.7 percent, also in line with expectations.

After dipping to nearly 152 yen against the dollar in late October, the Japanese currency has gradually rebounded as speculation grows that the BoJ may tighten its policies.

The interest rate gap between Japan and the United States is also a key factor that has driven the yen lower against the greenback.

That is expected to narrow as the US Federal Reserve has held rates steady after a lengthy series of hikes to battle inflation, hinting it will finally cut rates next year.

E.Jones--SFF