Japan's Core CPI Hits 19-Month High, Reinforcing Rate Hike Expectations
Japan's core consumer price index (CPI) surged 3.2% year-over-year in January, its highest level in 19 months, according to data released on Friday. The increase exceeded market expectations of a 3.1% gain and follows a 3.0% rise in December.
Excluding volatile fresh food prices, core CPI inflation has surpassed the Bank of Japan's (BOJ) 2% target for nearly three years, prompting hawkish remarks from policymakers. Hajime Takata, a BOJ board member, recently warned of rising inflationary pressures.
A separate index that strips out both fresh food and energy costs, a key measure of demand-driven inflation monitored by the BOJ, climbed 2.5% year-over-year in January, its fastest pace since March 2024 (2.9%).
The data aligns with recent increases in Japanese government bond (JGB) yields, as markets anticipate more aggressive rate hikes by the BOJ due to sustained wage gains that could boost consumer spending.
In January, the BOJ raised its short-term interest rate from 0.25% to 0.5%, signaling its belief that Japan is on track to achieve its 2% inflation target sustainably. Governor Kazuo Ueda has indicated a willingness to continue raising rates if wages continue to rise and support consumption, enabling firms to increase compensation.
Japan's economy grew at an annualized rate of 2.8% in Q4 2023, supported by robust business expenditure and consumption, reinforcing the BOJ's stance on further rate hikes. Annual wholesale inflation accelerated to a seven-month high of 4.2% in January, highlighting persistent price pressures.
Economists surveyed by the private sector largely expect the next rate hike to occur in the latter half of 2024.