BOJ Rate Hike Hardly Imminent with CPI Below Target

The new week begins with the Bank of Japan (BOJ) becoming the first major central bank to meet in 2022.  The good news for BOJ policymakers meeting January 17-18:  inflation is creeping higher and the economy is picking up. The bad news?  Inflation is rising for the wrong reasons and this poses a problem for central bank officials.

On Friday, the USD/JPY settled at 114.205, up 0.039 or +0.03%. Also on Friday, the Invesco CurrencyShares Japanese Yen Trust finished at $82.15, down $0.05 or -0.06%.

Consumer prices rose at their fastest pace in nearly two years in November. Even Japan’s giant of affordable attire, Uniqlo says it has no choice but to raise prices – a change in a nation where deflation is the norm and firms deal with any rise in costs by tightening belts rather than passing them on, Reuters wrote.

The problem is, instead of being the fruit of nearly a decade of super-charged monetary stimulus, rising prices are being driven by surging energy prices and a weakening Japanese Yen.

Central bank officials face the challenge of preventing rising living costs from hurting weak household spending and a fragile recovery. So we’ll be watching to see if the BOJ will start discussing how it can start telegraphing a rate hike while maintaining its ultra-easy policy this year.

BOJ under Pressure to Make a Move after Consumer Inflation Jumps to Nearly 2-Year High

Japan’s November consumer inflation marked the biggest year-on-year rise in nearly two years on surging fuel costs, a sign that the fallout from global commodity price gains is broadening.

The data released in late December highlights the fresh challenge policymakers face in preventing rising costs of living from hurting already weak household spending and Japan’s fragile economic recovery.

Meanwhile, BOJ Governor Haruhiko Kuroda is on record saying that a weak yen could be inflicting bigger pain on households than before by pushing up prices of imported goods.

Japan’s core consumer price index (CPI), which excludes volatile fresh food but includes oil costs, rose 0.5% in November from a year earlier, government data showed, exceeding a median market forecast for a 0.4% gain. It was the biggest increase since February 2020 and followed a 0.1% rise in October.

Short-Term Outlook

Back in December, most analysts said the rise in inflation is unlikely to prompt the BOJ to withdraw monetary stimulus any time soon, with inflation still distant from the central bank’s 2% target.

However, that won’t stop policymakers from debating how soon they can start telegraphing an eventual interest rate hike, which could come even before inflation hits the bank’s target, sources told Reuters, emboldened by broadening price rises and a more hawkish Federal Reserve.