World Stock Watch

Japan’s Inflation Rate Hits 16-Month High, Paving Way for Interest Rate Hike

Core Inflation Reaches 3%, Exceeding Expectations

Japan’s core inflation rate has surged to a 16-month high, reaching 3% in December, year on year. This significant increase has strengthened the case for an interest rate hike by the Bank of Japan. The latest reading matches the expectations of economists polled by Reuters and surpasses the 2.7% growth in prices recorded in November.

Sustained Inflation Above Target

The core inflation rate, which excludes fresh food prices but includes energy, has now matched or exceeded the Bank of Japan’s 2% target for 33 consecutive months. This sustained inflation above target provides a solid foundation for the central bank to consider raising interest rates.

Headline Inflation Accelerates

The headline inflation rate in Japan has accelerated sharply, reaching 3.6% in December, up from 2.9% in November. This marks the highest level since January 2023. The strong inflation reading offers the Bank of Japan more room to maneuver and consider raising rates.

“Core-Core” Inflation Holds Steady

The “core-core” inflation rate, which strips out prices of both fresh food and energy, has held steady at 2.4%. This rate is closely tracked by the Bank of Japan and provides a more nuanced view of inflation trends.

Market Reaction and Rate Hike Expectations

Immediately after the data release, the yen marginally weakened against the dollar, trading at 156.1. Economists expect the Bank of Japan to raise its key policy rate by 25 basis points, bringing it to 0.5%, the highest level since 2008. Public comments from Governor Kazuo Ueda and other senior BOJ officials have hinted at the central bank’s willingness to hike rates.

BOJ’s Policy Meeting and Rate Hike Possibility

The Bank of Japan’s policy meeting is set to conclude today, and the strong inflation reading has increased the likelihood of an interest rate hike. Governor Ueda has indicated that the central bank would raise rates if “improvements in the economy and prices continue.”