According to data released on Friday, core inflation in the capital of Japan decreased in September for the third consecutive month, primarily due to lower gasoline prices. This suggests that cost-push pressures are beginning to peak, which is good news for the fragile economic recovery.

Separate data, however, revealed that factory output remained unchanged in August, an indication that businesses were suffering as a result of sluggish global demand and developments in China’s economy.

Consumer morale deteriorated in September, according to a government survey issued on Friday, as many households have yet to see income growth sufficient to balance growing living expenses.

The data set highlights the difficulty the Bank of Japan will confront in figuring out when to start winding down its enormous stimulus programme without stifling growth, according to economists.

“Even though inflation is now moderating, it is doing so less quickly than the Bank of Japan had anticipated. Accordingly, the Board will need to revise up their inflation forecast for the current fiscal year further at their next meeting in October,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

“Our view is that the Bank will use the current window of opportunity to abandon negative interest rates and have pencilled in a rate hike in January next year.”

The Tokyo core consumer price index (CPI), which includes fuel prices but excludes volatile fresh food prices, up 2.5% from a year earlier in September, vs a median market expectation of a 2.6% increase.

It increased less slowly than in August (2.8%), but it nevertheless went above the Bank of Japan’s 2% objective for the 16th consecutive month.

The BOJ constantly monitors this index in order to better understand general pricing trends. It increased 3.8% from a year earlier in September following an increase of 4.0% in August.

Last year, rising global commodity prices forced many Japanese businesses to abandon their opposition to price increases and pass on greater costs to consumers, which kept inflation higher than the BOJ’s objective for longer than policymakers had anticipated.

Due to the inflation overshoot, the BOJ this month made minor adjustments to its bond yield management strategy, which markets interpreted as a departure from decades of ultra-loose monetary policy.

However, Governor Kazuo Ueda has ruled out the possibility of leaving ultra-loose policy early, stating that it must wait until salaries increase sufficiently to sustainably manage inflation at or around 2%.

In April through June, Japan’s GDP grew by an annualised 4.8% as strong exports offset poor consumer spending.

Analysts, however, predict a little contraction in the quarter of July to September as weak global demand weighs on exports.

Manufacturing output declined in August as a result of Toyota Motor Corp. plant closures, underscoring the fragile state of the export-dependent economy.

According to a government poll of manufacturers, output will rise 5.8% in September and 3.8% in October, however the outlook is clouded by global economic uncertainty, according to a government official who briefed reporters on the output statistics.

(Adapted from BusinessToday.in)

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