(Bloomberg) -- Inflation in Tokyo accelerated for a second month in December while the labor market remained tight, results that largely keep the Bank of Japan on track for an interest rate hike next year.
Consumer prices excluding fresh food rose 2.4% in the capital, quickening from growth of 2.2% the previous month, the Ministry of Internal Affairs reported Friday.
Tokyo’s figures serve as a leading indicator for national trends. Separate data showed the labor market staying tight in November with the jobless rate unchanged at 2.5%, while factory output declined less-than-expected on a monthly basis after robust gains in September and October. Retail sales came in stronger than forecast.
Overall, the data point to an economy making a patchy recovery with a reasonably solid inflation trend. While the figures suggest extreme stimulus from the central bank isn’t needed by the economy to continue its expansion, none of the data indicates a pressing urgency to raise interest rates next month, either.
“The BOJ will likely be choosing between January and March, depending on wage developments,” said Koya Miyamae, a senior economist at SMBC Nikko Securities.
The acceleration in the capital’s inflation was largely driven by 13.5% gains in energy prices, following the phasing out of government subsidies for gas and electricity bills. The reading was the strongest since August, though a shade softer than economists’ consensus for a 2.5% gain. The subsidies had shaved 0.31 percentage point from the overall price index a month earlier.
Under Prime Minister Shigeru Ishiba the subsidies will be revived from January through March, reintroducing a distortion in the inflation picture going forward. A deeper measure of the inflation trend that excludes the energy distortions showed prices rising at a slower pace of 1.8%, compared with 1.9% a month earlier, indicating that Japan doesn’t have a rampant problem with hot prices that needs immediate action.
The yen was around the 157.55 mark against the dollar following the data and the release of opinions from the central bank’s recent meeting. That’s close to a five-month low. Further yen weakness could fuel inflationary pressure via higher import costs.
The weak currency is another factor the central bank is likely considering as it times its next move. Should the exchange rate approach 160, speculation of possible intervention by Japan’s government and a January rate hike is likely to escalate.
Keen to ensure Japan can establish a virtuous economic cycle sustained by stable price and wage growth, along with solid private consumption, Ishiba rolled out a ¥21.9 trillion ($139 billion) economic package last month.
Ishiba’s government also approved Friday a ¥115.5 trillion annual budget for the year starting in April. But his minority government still remains short of enough support in parliament for the budget to pass. A small opposition party that has been in talks with the government is wary of a rate hike before March, a factor that could make Ishiba’s administration reluctant to fully back a January move by the BOJ.
What Bloomberg Economics Says...
“We still have high conviction that the BOJ will proceed with three 25-basis-point hikes next year — in January, April and July — taking the target rate up to 1.0% from 0.25% now.”
— Taro Kimura, economist
Click here to read the full report
BOJ Governor Kazuo Ueda’s recent comments suggest some cautiousness in the central bank’s view. He reiterated the bank’s stance on Wednesday, stating that the bank will adjust the degree of monetary accommodation based on developments in economic activity, prices and financial conditions. While he left the door open for a January hike, some market players and economists have shifted their base case hike scenarios to March.
More information on annual wage deals will be available then, providing the central bank with more justification to hike rates on the basis of higher pay supporting consumption and the inflation trend.
The labor data released Friday showed the jobs-to-applicants ratio unchanged at 1.25 in November, meaning there were 125 positions available for every 100 job seekers, an indication of labor market tightness that can push up wages.
The industry ministry reported that industrial output fell 2.3% in November from a month earlier as production of chip-making gear and flat-panel making equipment fell. Retail sales increased 1.8% from a month earlier with clothes purchases boosting spending from a year ago to 2.8%, not much above the inflation mark.
Looking ahead, production may find weaker external support if President-elect Donald Trump follows through with protectionist policies that hit world trade. The BOJ will also be keeping a close eye on the impact of US policies on the global economy.
“Trump is aiming to revive US manufacturing activity. So there will certainly be some positive aspects for the US economy,” said Miyamae. “But the imposition of tariffs is generally bad for the global economy, putting downward pressure on manufacturing in particular.”
(Adds economist comment, more details from releases)
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