According to data released on Friday, the Tokyo core consumer price index (CPI), which strips out volatile fresh food prices, surged 2.4% year-on-year in December, slightly below the 2.5% expected by the market. This follows a 2.2% increase in November.
Another index, which removes both fresh food and fuel costs and is closely monitored by the Bank of Japan (BOJ) as an inflation measure influenced by domestic demand, showed a 1.8% rise in December after a 1.9% increase in November.
Meanwhile, November saw a decline in factory output for the first time in three months, falling 2.3% compared to October due to reduced production in sectors like semiconductor equipment and automobiles, highlighting the challenges faced by the export-driven economy amid weakening global demand.
Service-sector prices advanced by 1.0% in December, up from a 0.9% rise in November, reinforcing the notion that ongoing wage gains could allow companies to raise service prices, aligning with the BOJ’s objective to normalize its monetary policy.
The Tokyo inflation figures serve as a leading indicator of national trends and are crucial for policymakers in assessing Japan’s progress toward consistently achieving the BOJ’s 2% inflation target—a key condition for further rate hikes. Nonetheless, some analysts warn of weaknesses in Japan’s economic condition and price pressures that might postpone any immediate rate adjustments by the BOJ.
The uptick in Tokyo’s inflation rates was primarily fueled by climbing utility costs and rising prices for staples such as rice. These factors might dampen consumer spending and potentially dissuade companies from implementing further price hikes.
Notably, while the BOJ ended its negative interest rate policy in March and raised the short-term rate to 0.25% in July, it has kept rates unchanged since, with BOJ Governor Kazuo Ueda favoring further data evaluation.
Economists’ expectations polled by Reuters predicted the BOJ would lift the rate to 0.5% by March 2024, with attention now on whether a rate increase will occur in the upcoming January 23-24 policy meeting or in the subsequent review in March.
