Headline: Japan's Inflation Reaches 3%, Signaling Rate Hike by Central Bank
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Tokyo's key inflation gauge surged to 3% in December 2023, marking the first time it has breached this threshold in 16 months. The rise is attributed primarily to higher energy costs, which have fueled a sustained increase in prices across the country.
The latest inflation data aligns with earlier trends in Tokyo, where energy prices have served as the main driver of inflation following the expiration of gas and electricity subsidies. Nationwide, energy prices spiked by 10.1% in December.
The acceleration in inflation strengthens the case for the Bank of Japan (BOJ) to raise interest rates later on Friday, a move widely anticipated by markets and economists. Speculation of a January rate hike has intensified following positive indicators regarding wage growth and relative market stability during US President Donald Trump's second term.
"The data provide 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."
According to a recent Bloomberg poll, approximately 75% of economists forecast a rate increase later Friday. Overnight-indexed swaps also suggest that a January rate hike is nearly fully priced in.
The BOJ is also scheduled to release its quarterly economic outlook report at the conclusion of Friday's meeting. Officials are expected to upgrade their underlying inflation forecast for the current and following fiscal years.
Despite the anticipated rate hike, Japan's currency is likely to remain under pressure, further supporting inflation through higher import costs. The yen has been trading at or below 155 against the dollar for the past month, reflecting expectations of a widening rate differential with the US.
Rising prices continue to burden consumers amid sluggish wage growth, posing a significant challenge for Prime Minister Shigeru Ishiba. The BOJ's latest household sentiment report indicates that inflation expectations among Japanese households have surged to record highs as the cost of living remains elevated.
To alleviate the impact, Ishiba's government has implemented an economic package that includes revived utility subsidies from January to March and cash handouts for low-income households. These reinstated subsidies are expected to temporarily reduce inflation.
Meanwhile, the regular diet session will resume later Friday, where Ishiba faces a crucial test in swiftly passing the initial budget for this year amidst pressure from opposition parties. Earlier, Ishiba's minority ruling coalition decided to raise the tax-free income ceiling, aiming to boost disposable income and stimulate private consumption.
Ishiba's measures also include support for future wage growth, a key component of the virtuous economic cycle targeted by both the government and the BOJ. Japan's largest union federation is demanding an overall wage increase of at least 5%, aligning with last year's demand.
"The data suggest a gradual but steady progress toward the price stability target," said Takeda. "There's progress in the virtuous cycle between wages and prices."