Tokyo Inflation Accelerates as Subsidies Phased Out For Now

Stocks in Asia and parts of Europe rose on Thursday as investors bet that new data showing inflation easing would finally persuade central bankers to lower interest rates from multidecade highs. The rally has pushed stock indexes on both sides of the Atlantic into record territory.

Another test comes on Thursday when Walmart, a bellwether for U.S. consumer sentiment, reports quarterly results.

The market moves follow Wednesday’s Consumer Price Index report, which came in better than expected. The data showed that so-called core inflation, which strips out volatile food and fuel costs, rose by 3.6 percent on an annual basis last month, the lowest level in three years.


Inflation remains well above the Fed’s 2 percent target, but traders were encouraged by the results. The futures market now sees two Fed rate cuts this year, the first most likely coming in September.

Economists’ main takeaways from the report:
- The good: Grocery, auto, and airfare inflation eased.
- The concerning: Housing inflation, a huge driver of the overall rate, showed only a modest improvement.
- The puzzling: The Bureau of Labor Statistics accidentally published the data on the web ahead of schedule. But there were no obvious signs that traders (or their bots) had tried to profit from that mistake, with markets fairly quiet until just after 8:30 a.m. Eastern, the expected release time.

The S&P 500 is up more than 11 percent this year, blowing past most analysts’ 2024 forecasts. At the start of the year, the Wall Street consensus was for inflation to steadily ease, rate cuts to start as soon as the spring, and markets to rally modestly. Stubbornly high inflation upended that prediction — yet stocks have outperformed many of even the most bullish predictions.

Stronger-than-expected corporate earnings have helped, despite concerns about consumers pulling back on spending. Another factor: The Fed has all but ruled out raising rates, giving investors the sense that monetary policy will be no more restrictive than it is today.

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In Japan, inflation has been a persistent concern, with the annual rate hovering around 2.5% in recent months. However, the government's decision to phase out utility subsidies has led to an acceleration in inflation, with the core consumer price index for the Ku-area of Tokyo in Japan rising to 2.4% year-on-year in March 2024. This increase comes after the index fell to 1.6% in April, its lowest level since March 2022.

The Bank of Japan (BOJ) has been closely monitoring inflation trends, and the recent acceleration in Tokyo's inflation rate may influence its monetary policy decisions. The BOJ has indicated that it will raise interest rates if the economy performs in line with its view, and the latest inflation data could potentially support this stance.

However, the reintroduction of energy subsidies in January 2025 may have an impact on the trajectory of inflation and consumer spending in Japan. The temporary reintroduction of energy subsidies is expected to push up the nation's key inflation gauge by a certain percentage point, intensifying the cost-of-living crunch for households and causing a drag on the economy. Higher energy costs are likely to feed into prices across the economy over time, shifting the underlying trend and possibly raising inflation expectations.

The BOJ may need to adapt its interest rate policy in response to the subsidy phase-out and its impact on inflation and economic growth. If the subsidy reintroduction leads to a significant slowdown in inflation, the BOJ might consider pausing or reversing its rate hikes. However, if the impact on inflation is minimal or temporary, the BOJ may continue with its planned rate hikes to maintain its 2% inflation target.

In conclusion, the recent acceleration in Tokyo's inflation rate, driven by the phase-out of utility subsidies, may influence the BOJ's monetary policy decisions. The temporary reintroduction of energy subsidies in January 2025 could have an impact on the trajectory of inflation and consumer spending, potentially requiring the BOJ to adjust its interest rate policy in response.