Inflation in the Tokyo area continues to moderate, as observed in a recent bottom-up analysis from Commerzbank. Not surprisingly, seasonally adjusted data indicates that new price pressures remain muted. This combination has resulted in a surprising lack of inflationary pressure, with prices increasing a mere 0.1% in three months. That increase is still far below the annual inflation target of 2%. For one, it indicates a strong new trend in the economic environment for consumers and market participants alike.
It’s the first return to sub-two percent inflation after months of pandemic-inflated high marks. Food prices, which a few months ago were front and center in inflationary worries, are showing clear signs of rapid cooling. As a result of this change, overall inflation rates have been dramatically lowered. It delivers a much-welcomed ray of hope for solidity within the Tokyo economy.
We spoke to FX analyst Michael Pfister of Commerzbank about what these surprising new numbers mean for market expectations.
“In short, after many months of elevated inflation, the latest figures seem to be pointing in the right direction. This should further dampen market participants’ expectations of interest rate hikes and limit hopes of strong JPY appreciation.” – Michael Pfister
Prices rose by 0.1% over the past quarter. This modest increase is reflective of a trend toward stabilization after a long stretch of upward inflationary forces. The monthly—and yearly—inflation rate that reached a peak of 9.1% in June is now significantly down trending over the last five months. Pfister has observed the importance of this trend, saying that, “
“After many months of food prices fuelling inflationary pressure, this is cooling significantly. Over the last three months, prices have risen by only 0.1% in total, which is well below the annualised inflation target of 2%.” – Michael Pfister
While inflation rates have dropped to more palatable numbers, analysts are looking toward the future with an aspirational eye. They would like to know how these trends will determine future monetary policy and currency valuation. The shift in food prices, which had been a primary driver of inflation, could alter the economic dynamics in Tokyo and beyond.