Tokyo, Japan – Consumer prices in Tokyo unexpectedly rose by 2.6% year-on-year in March, a positive indicator for the nation’s overall inflation. The core inflation rate, excluding fresh food, eased slightly to 2.4%, but this is not anticipated to significantly impact the Bank of Japan’s policy direction. The Tokyo CPI saw a monthly increase of 0.3%, marking the fourth consecutive month of growth. Goods prices experienced a more pronounced increase compared to service prices. This data suggests that companies may be more confident in raising prices without impacting consumer willingness to pay. Additionally, with promising wage negotiation results for FY24, the Bank of Japan’s inflation growth target is looking achievable for the year.

Industrial production, on the other hand, unexpectedly declined again in February, posing challenges for Japan’s economy. The -0.1% month-on-month decrease in production was driven by various sectors including car manufacturing, machinery, steel, and chemicals. Despite the drop, there is optimism for a recovery in the near future, particularly in IT/semiconductor production. The weaker-than-expected industrial production figures add downward pressure to the GDP growth forecast.

Nevertheless, solid retail sales figures have been a bright spot in Japan’s economic data. Retail sales grew by 1.5% month-on-month in February, indicating potential improvement in household consumption. Although motor vehicle sales were weak due to a major car manufacturer’s safety scandal, other sectors such as general merchandise, apparel, and machinery saw growth. This positive trend in retail sales is expected to continue, supporting the Bank of Japan’s policy normalization efforts.

Labor conditions softened slightly in February, with the jobless rate rising to 2.6%. However, the manufacturing job losses were likely influenced by production interruptions rather than a broader economic downturn. The Bank of Japan is closely monitoring these economic indicators to gauge the overall health of the economy and make informed policy decisions.

Looking ahead, the Bank of Japan is likely to consider rate hikes in the second half of 2024 if consumption continues to recover and inflation remains above 2%. With strong wage growth expected to drive consumption, the policy rate could reach 0.5% by year-end. These projections are contingent on various macroeconomic factors and the Bank of Japan’s assessment of the evolving economic landscape.