Japan's Core Inflation Hits 1-Year High, Keeping BOJ Rate Hike Bets Alive

Japan's core inflation in Tokyo, excluding volatile fresh food costs, has surged to a near year-high of 2.5%, bolstering market expectations for further interest rate hikes, as reported by Reuters.

This marks the third consecutive monthly increase, matching the peak reached in February 2022. The rise, in line with median market forecasts, comes despite the Bank of Japan's (BOJ) decision last week to raise interest rates to 0.5%, the highest level since the 2008 financial crisis.

Analysts anticipate inflation to accelerate further, potentially reaching 3% in the coming months, driven by a persistent weak yen and escalating import costs. "Price pressures from rising raw material costs are proving stickier than expected, which may prevent real wages from turning positive and hurt consumption," noted Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute, to Reuters.

The BOJ is closely monitoring a separate Tokyo index that excludes both fresh food and fuel costs. This index, which rose 1.9% year-on-year in January, provides further evidence of the impact of rising living costs on households. Prices across a broad range of goods and services have increased, highlighting the cost-push nature of inflation.

The overall Tokyo CPI, including fresh food, jumped 3.4% year-on-year in January, the fastest pace in nearly two years, driven by soaring vegetable and rice prices.

The BOJ, having recently exited a decade-long period of ultra-loose monetary policy, is now expected to continue raising interest rates. However, uncertainty remains about whether wage growth will keep pace with rising living costs, and whether this will ultimately support strong consumer demand.

"Just looking at inflation, the BOJ might see scope to raise interest rates once or twice this year. But much depends on whether consumption and the broader the economy hold up," stated Shinke.

Despite the rise in inflation, data released by the BOJ shows that factory output in December rose only 0.3% month-on-month, highlighting the fragility of the Japanese economy.