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Japan's Inflation Eases, but BoJ Policy Shift Remains on a Knife-Edge

Japan's latest inflation data for December indicates a monthly increase of 0.1% and an annual rise of 2.6%, aligning closely with expectations. The core CPI registered at 2.3%, while the super core inflation rate reached 3.7% year-over-year. This deceleration in overall price gains can be attributed to reduced electricity and gas costs, coupled with diminished upward pressure from processed food prices.

Our Take: Although inflationary pressures in Japan are showing signs of moderation, this trend is unlikely to deter the Bank of Japan (BoJ) from moving away from its Negative Interest Rate Policy (NIRP). The decision remains finely balanced leading up to next week's meeting. Our inclination leans towards a postponement until March, allowing time to assess the outcome of wage negotiations. However, the recent depreciation of the Japanese Yen suggests that markets may be underestimating the likelihood of a policy shift as soon as January 23.


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