Japan’s Core Inflation Hits 19-Month High, Strengthening Expectations for BOJ Rate Hikes

Japan’s core consumer inflation accelerated in January, reaching 3.2% year-on-year—its fastest pace in 19 months—according to data released earlier:

• Japan January Core CPI 3.2% y/y vs. 3.1% expected

The stronger-than-expected increase reinforces expectations that the Bank of Japan (BOJ) may continue raising interest rates as inflationary pressures persist. Price rises appear to be moving in line with the Bank’s forecasts.

• The core consumer price index (CPI), which excludes fresh food prices, hit 3.2% and slightly exceeded market forecasts of a 3.1% increase and followed December’s 3.0% rise.
• A separate measure of inflation, which strips out both fresh food and fuel costs and is closely monitored by the BOJ as an indicator of demand-driven price pressures, climbed 2.5%—the fastest annual pace since March 2024.
• Headline inflation hit 4.0%, the highest level in two years.

Analysts note that

• services inflation isn’t accelerating, rising 1.4% year-on-year in January compared to 1.6% in December
• as a balance, goods inflation isn’t slowing

For nearly three years, Japan’s inflation has remained above the BOJ’s 2% target. This has prompted a shift in monetary policy.

• In January, the BOJ raised its short-term interest rate to 0.5% from 0.25%, citing progress toward sustainably achieving its inflation target.
• Governor Kazuo Ueda has signalled that further rate hikes could follow if wage growth continues to support consumption, enabling firms to raise salaries and maintain price increases.

Also from Japan today:

• Japan finance minister Kato – higher long term rates can pressure Japan’s fiscal situation
• Japan Jibun February preliminary manufacturing PMI 48.9 (prior 48.7)
• Japanese Industry and Trade Minister Muto will head to the US to talk tariffs
• Bank of Japan Governor Ueda sees the bright side of higher interest rates
• More from BOJ’s Ueda – Ready to respond to abnormal market moves

Since that last post, Ueda warning he’d intervene in JGBs yields on the government bonds have dropped back a little.

This article was written by Eamonn Sheridan at www.forexlive.com.