Japan’s March Core Inflation Decelerates, Weak Yen Challenges BOJ Policy Decisions

In March, Japan witnessed a slowdown in core inflation and a significant index that tracks broader price trends dropped below 3 percent for the first time in more than a year, according to recent data. This development presents a new challenge for the Bank of Japan (BOJ) as it continues to navigate through complex economic conditions exacerbated by the weakening yen.

The national core consumer price index (CPI), which omits fresh food but includes energy costs, increased by 2.6 percent year-over-year in March, aligning with median market expectations. This rise represents a deceleration from February’s 2.8 percent increase, primarily due to slower growth in food prices, yet it remains above the BOJ’s target of 2 percent. Additionally, another critical measure that excludes both fresh food and energy saw its growth moderate to 2.9 percent from 3.2 percent in February, marking the first drop below 3 percent since November 2022. This metric is particularly significant to the BOJ as it reflects underlying inflation trends.

Financial markets are now speculating about the potential timing for the next interest rate hike by the BOJ, following its recent move to end negative interest rates. This was a notable shift from the ultra-loose monetary policy that Japan has maintained for over a decade. Amid these policy adjustments, the focus remains on whether inflation, particularly in services and wages, will continue to moderate. Masato Koike, an economist at Sompo Institute Plus, noted that while the slowdown in goods price inflation was anticipated, the yen’s depreciation and rising crude oil prices due to Middle Eastern tensions were not.

BOJ Governor Kazuo Ueda has indicated that further rate increases could be considered if the yen’s weakness significantly pressures inflation upwards. The central bank has emphasized that achieving a stable 2 percent inflation target along with robust wage growth are key goals for normalizing monetary policy.

Despite the largest wage increases in 33 years being implemented by Japanese firms this year, inflation-adjusted real wages have been declining for nearly two years. This wage trend, combined with a depreciating yen, is likely to strain household purchasing power further and suppress consumer spending.

An official from the internal affairs ministry highlighted that the effects of recent wage hikes have not yet impacted service prices significantly. The government has committed to monitoring these developments closely, reflecting the ongoing challenges in balancing economic growth with stable inflation.