Inflation in Tokyo Rises, But Falls Short of Expectations

Forex - Core inflation accelerated in December in Tokyo, the capital of Japan, keeping market expectations for interest rate hikes alive in the near term.

Excluding volatile fresh food costs, the Tokyo core consumer price index (CPI) rose by 2.4% year-on-year in December, while the median market forecast was a 2.5% increase. This rise followed a 2.2% annual increase in November.

Another index closely monitored by the Bank of Japan (BOJ) as a better indicator of demand-driven inflation, excluding fresh food and fuel costs, increased by 1.8% year-on-year in December after a 1.9% rise in November.

Service sector prices rose by 1.0% in December, following a 0.9% increase in November, underscoring the view that continued wage growth is prompting firms to charge more for services.

Senior economist Masato Koike from the Sompo Institute Plus stated, “There is a possibility of higher wages being reflected in service prices, which is positive for the BOJ's normalization of its policy.”

Tokyo's inflation data, considered a leading indicator of nationwide trends, is closely monitored by policymakers for clues about how much progress Japan has made towards permanently achieving the BOJ's 2% inflation target—a prerequisite for further interest rate hikes.

However, some analysts have observed signs of weakness in the Japanese economy and pricing momentum that could delay the BOJ's interest rate hike timing.

The increase in Tokyo's inflation was largely attributed to high electricity bills and food prices, such as rice, which could put pressure on consumption and deter firms from raising prices further.