Japan's core inflation rose to 3% in December, boosting rate hike expectations.

On Friday,Is it true that foreign exchange makes money Japan's Ministry of Internal Affairs published the latest data showing that the national core Consumer Price Index (CPI) rose by 3% year-on-year in December, reaching this level for the first time in 16 months. This figure aligns with market expectations and surpasses November's 2.7%. Driven primarily by rising energy prices and accelerated inflation in the service sector, Japan's price levels continue to climb, providing ample reason for the Bank of Japan to consider a rate hike at the upcoming policy meeting.

Inflation data supports a rate hike

Data indicates that Japan's energy prices rose 10.1% year-on-year in December, significantly driving inflation. Moreover, the core-core CPI, excluding energy and fresh food prices, rose by 2.4% year-on-year, while service sector inflation slightly accelerated to 1.6%. Inflation data from the Tokyo area reflects a similar trend, with the December core CPI rising by 2.4% year-on-year, the highest since last August.

Atsushi Takeda, Chief Economist at Itochu Research Institute, stated: "This series of data provides a solid basis for the Bank of Japan to raise rates." According to the latest survey, approximately three-quarters of economists expect the Bank of Japan to announce a rate hike at its meeting this Friday, with overnight index swaps indicating the market has fully priced in a January rate hike.

Central bank policy and economic outlook

As rate hike expectations grow, the Bank of Japan will also release its quarterly economic outlook report after Friday's meeting. It is reported that central bank officials may raise core inflation forecasts for this fiscal year and the next. Previous forecasts indicated that inflation for the fiscal year ending in March might rise by 2%, with a 1.9% increase expected for the next fiscal year. Bloomberg Economics economist Taro Kimura believes that December's inflation data decisively supports a Bank of Japan rate hike.

Yen movements and consumer pressure

Although a rate hike is widely anticipated, the yen may continue to face pressure. The USD/JPY exchange rate has recently remained around 155 yen, reflecting that the interest rate gap between the U.S. and Japan will persist for some time. This trend has increased import costs and supports inflation.

Meanwhile, the pressure on consumers from rising prices continues to grow, particularly amid stagnant wage growth, presenting a mounting challenge for Japanese Prime Minister Shigeru Ishiba. According to the Bank of Japan's latest quarterly household confidence report, Japanese families' inflation expectations have reached historic highs due to rising living costs.

To address this challenge, the Ishiba administration has launched an economic plan to restore utility subsidies from January to March and provide cash assistance to low-income households. These measures aim to ease the impact of rising prices on consumers, but the subsidy policy may temporarily suppress inflation.

Government policy and future challenges

The Japanese parliament will reconvene later on Friday, and the Ishiba administration needs to promptly pass an initial budget to support the new economic plan, which includes initiatives focusing on future wage growth. Wage growth is seen as a core objective for the Japanese government and central bank in building a virtuous economic cycle, yet achieving this goal remains a significant challenge.

Overall, as core inflation continues to rise and policy expectations become clearer, Japan's economic and monetary policy is entering a critical adjustment period. In the future, the synergy between central bank policy and government economic stimulus measures will be a focal point in observing Japan's economic trajectory.

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