Japan’s Inflation Jumps to 3%, Giving Support to Rate-Hike Case

(Bloomberg) — Japan’s key inflation gauge hit 3% for the first time in 16 months, underscoring the nation’s sustained price momentum just hours before the central bank is expected to hike rates for a third time under Governor Kazuo Ueda.

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Consumer prices excluding fresh food rose 3% from a year earlier in December, accelerating from 2.7% in the previous month through higher energy costs, the Ministry of Internal Affairs reported Friday. The reading matched the consensus estimate and marked the first time it hit 3% since August 2023.

The acceleration was consistent with earlier inflation data for Tokyo, where higher energy prices were the primary driver following the phasing out of gas and electricity subsidies. Nationally, energy prices climbed 10.1% in December.

Service inflation also accelerated a tad to 1.6%, while an index excluding energy costs and fresh food prices advanced 2.4%, unchanged from the pace in November.

The solid inflation data support the case for the Bank of Japan to raise interest rates later on Friday, a move widely anticipated by markets and economists. Speculation of a January rate hike has intensified especially after the BOJ top brass pointed to positive developments regarding wage hikes, and markets kept relatively calm in the first days of US President Donald Trump’s second term.

“The data give solid reassurance for the BOJ,” said Atsushi Takeda, chief economist at Itochu Research Institute. “The bank could confirm that there is no need to hold back on raising rates.”

The latest Bloomberg poll showed that around three quarters of economists forecast a rate increase later Friday, while overnight-indexed swaps have suggested a January rate hike is almost fully priced in.

The BOJ is also scheduled to release its quarterly economic outlook report at the end of Friday’s meeting, where officials are said to upgrade their underlying inflation forecast for this fiscal year and next. In October, the bank projected that inflation excluding fresh food and energy would rise 2% in the current fiscal year ending in March, and 1.9% in the following year.

What Bloomberg Economics Says…

“A hotter reading on Japan’s inflation in December will give the Bank of Japan a final nod to proceed with a widely-expected rate hike today.”

— Taro Kimura, economist

For the full report, click here

Despite an anticipated rate hike on Friday, Japan’s currency is likely to remain under pressure, supporting inflation through higher import costs. The yen has been trading at around 155 or weaker against the dollar for about a month, reflecting expectations that the rate differential with the US will remain wide for some time.

Steeper prices continue to strain consumers amid lackluster wage growth, presenting a significant challenge for Prime Minister Shigeru Ishiba. Japan’s household inflation expectations rose to the highest level on record as the cost of living stays elevated, according to the BOJ’s latest quarterly household sentiment report.

To mitigate the impact, Ishiba’s government rolled out an economic package, which includes utility subsidies that will be revived from January through March, and cash handouts for low-income households. The reinstated subsidies are likely to bring down inflation again.

The regular diet session will resume later Friday, where Ishiba will likely face a key test of whether he can pass the initial budget for this year in a timely manner, as opposition parties clamor for influence.

Earlier Ishiba’s minority ruling coalition decided to raise the tax-free income ceiling to ¥1.23 million ($7,880.6), up from ¥1.03 million, partly aiming to boost disposable income and spur private consumption. This proposal originated from the opposition Democratic Party for the People, whose support has been key to pass the economic package.

Ishiba’s set of measures also offers support for wage growth ahead, a key component of the virtuous economic cycle long sought by both the government and the BOJ. Japan’s largest union federation is demanding an overall wage increase of at least 5%, the same as last year.

“The data suggest a gradual but steady progress toward the price stability target,” said Itochu’s Takeda. “There’s progress in the virtuous cycle between wages and prices.”

(Updates with economist comments, background, more details from report.)

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