Jamie Spencer
Japan’s inflation rate rose 4% year on year in January, marking its highest level since January 2023 and strengthening the case for rate hikes by the Bank of Japan (BOJ). The core inflation rate, which excludes fresh food prices, increased to 3.2% from 3% in the previous month, exceeding economists’ expectations of 3.1%.
Core and Core-Core Inflation Details
The “core-core” inflation rate, which strips out prices of both fresh food and energy and is closely monitored by the BOJ, edged up to 2.5% from 2.4% in December. The headline inflation rate remained above the BOJ’s 2% target for the 34th consecutive month.
Following the inflation report, the yen appreciated 0.15% to trade at 149.39 against the dollar, reflecting market anticipation of potential monetary tightening.
Implications for Bank of Japan Policy
The inflation data bolsters the case for rate hikes by the BOJ, which considered tightening policy at its January meeting. The BOJ’s summary of opinions warned of inflation risks and a weakening yen, stating, “It will be necessary for the Bank to adjust the degree of monetary accommodation to avoid yen depreciation and financial overheating.”
BOJ Governor Kazuo Ueda said on Friday that the central bank is prepared to increase government bond purchases if yields rise sharply. Meanwhile, 10-year Japanese government bond yields fell to 1.402% after peaking at a 15-year high of 1.447% amid rate hike expectations.
Market Reactions and Economic Context
BOJ board member Hajime Takata indicated that the central bank might need to raise rates further to prevent excessive risk-taking and escalating inflation. His remarks followed stronger-than-expected GDP growth data, which showed Japan’s economy expanding 0.7% quarter-on-quarter and 2.8% on an annualized basis.
Despite this, full-year GDP growth for 2024 slowed to 0.1%, down from 1.5% in 2023. Analysts at the Commonwealth Bank of Australia and Bank of America noted that strong economic data and rising inflation risks increase the likelihood of earlier BOJ rate hikes.
Outlook for Rate Hikes
Bank of America analysts forecast BOJ rate hikes in June and December, projecting a terminal rate of 1.5% with additional hikes expected in June 2026 and Q1 2027. The analysts suggested that the BOJ is “likely growing more concerned” about inflation risks, which could prompt an earlier tightening of monetary policy.
