Tokyo Inflation Boosts BOJ Rate Hike Expectations

Tokyo Core Inflation Rises, Factory Output Falls 

In December, core inflation in Japan’s capital city rose, while inflation in services remained stable, according to data released on Friday, keeping market speculation alive that an interest rate hike could occur soon. However, factory production dropped in November for the first time in three months, signalling that weakening global demand is impacting the export-dependent economy. 

The Tokyo core consumer price index (CPI), which excludes the volatile prices of fresh food, climbed by 2.4% in December compared to the previous year, slightly below the market expectation of a 2.5% increase. This followed a 2.2% year-on-year increase in November. Another index, which excludes both fresh food and fuel prices and is closely monitored by the Bank of Japan (BOJ) as a better reflection of demand-driven inflation, rose 1.8% in December, down from a 1.9% increase in November. 

(Tokyo Core CPI y/y. Source: Statistics Bureau) 

Service prices in Tokyo increased by 1.0% in December, up from a 0.9% rise in November, reinforcing the BOJ’s view that ongoing wage growth is encouraging businesses to raise prices for services. 

The Tokyo inflation figures, seen as an early indicator of nationwide trends, are closely monitored by policymakers for insight into how much progress Japan is making toward consistently meeting the BOJ’s 2% inflation target, which is crucial for further rate hikes. Market participants are anticipating that the BOJ will raise rates to 0.5% by March of next year, with heightened focus on whether such a hike will be announced at the central bank’s next meeting on January 23-24. 

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