Core inflation in Tokyo picked up in December, while services inflation remained stable, according to data released on Friday. This bolstered market expectations for a potential interest rate hike by the Bank of Japan (BOJ) in the near future.
However, factory output declined in November for the first time in three months, reflecting the impact of weakening overseas demand on Japan’s export-driven economy.
The BOJ will consider these developments at its upcoming policy meeting on January 23-24, with some analysts anticipating a short-term rate hike.
In December, the Tokyo core consumer price index (CPI), which excludes fresh food costs, increased by 2.4% compared to the same month last year, slightly below the market’s median forecast of 2.5%. This followed a 2.2% rise in November.
A separate index, which excludes fresh food and fuel costs and is closely monitored by the BOJ as a measure of demand-driven inflation, rose 1.8% in December, down from 1.9% in November.
Prices in the service sector increased by 1.0% in December, up from a 0.9% rise in November. This aligns with the BOJ’s assessment that rising wages are encouraging businesses to charge more for services.
“Higher wages may continue to push up services prices, supporting the BOJ’s efforts to normalize policy,” said Masato Koike, senior economist at Sompo Institute Plus.
As a leading indicator for nationwide trends, Tokyo’s inflation data is closely examined by policymakers to assess progress toward the BOJ’s 2% inflation target—a key factor in determining future rate hikes.
Signs of Economic Weakness
Despite rising inflation in Tokyo, some analysts flagged concerns about Japan’s economic recovery and price momentum, which could delay any rate hikes.
The inflation increase was largely driven by higher utility bills and food prices, such as rice, which could dampen consumer spending and discourage companies from raising prices further.
Separate data showed that factory output in November fell by 2.3% from the previous month, due to decreased production of semiconductor equipment and automobiles. This raises doubts about the strength of Japan’s economic recovery.
“When you exclude the impact of rising utility bills, inflation lacks significant strength,” said Toru Suehiro, chief economist at Daiwa Securities, who predicts the BOJ will likely delay a rate hike in January.
BOJ’s Recent Policy Moves
The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25% in July, citing steady progress toward its inflation goal. However, rates have remained unchanged since then, including at the BOJ’s last meeting.
Governor Kazuo Ueda has emphasized the need for more data to assess wage trends and the incoming U.S. administration’s economic policies before making further policy adjustments.
A recent Reuters poll indicated that most analysts expect the BOJ to raise rates to 0.5% by March 2025. Attention is now focused on whether the central bank will act at its January 23-24 meeting or wait until the next scheduled review in March.
