Tokyo Inflation Surge Keeps Rate Hike Speculation Alive

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Core inflation in Tokyo rose in December, while services inflation remained stable, fueling market speculation about a potential interest rate hike by the Bank of Japan (BOJ).

However, factory output dropped in November for the first time in three months, signaling that weaker demand from overseas markets is affecting Japan's export-driven economy. 

These figures will be key considerations for the BOJ in its upcoming policy meeting on January 23-24, where some analysts anticipate a rate hike.

The Tokyo core consumer price index (CPI), which excludes volatile food prices, increased by 2.4% year-on-year in December, slightly below the forecasted 2.5% gain.

This followed a 2.2% increase in November. Another index, which excludes fresh food and fuel costs and is seen by the BOJ as a better gauge of demand-driven inflation, rose 1.8% in December, just shy of the previous month's 1.9% increase.

Service-sector prices saw a 1.0% rise in December, up from a 0.9% gain in November, reflecting the BOJ's view that sustained wage increases are prompting higher service costs.

"Rising wages may push up service prices, which could help the BOJ in normalizing policy," said Masato Koike, senior economist at Sompo Institute Plus.

Tokyo's inflation data, often a precursor to national trends, is crucial for BOJ policymakers in evaluating progress toward meeting the BOJ's 2% inflation target, which is necessary for further rate hikes.

However, some analysts see signs of economic weakness that could delay a rate hike. The increase in inflation was mainly driven by higher utility bills and food prices like rice, which could dampen consumer spending and limit further price hikes by businesses.

In a separate report, factory output fell by 2.3% in November, primarily due to reduced production of chip equipment and automobiles, raising concerns about Japan's fragile economic recovery.

"When excluding the impact of rising utility bills, inflation shows no clear strength," said Toru Suehiro, chief economist at Daiwa Securities, who expects the BOJ to hold off on a rate hike in January.

The BOJ ended its negative interest rate policy in March and raised its short-term policy rate to 0.25% in July, citing steady progress toward its inflation target.

Since then, it has kept rates unchanged, including at its December meeting. Governor Kazuo Ueda indicated he wanted more data on wage growth and clarity on U.S. policies before deciding on further rate hikes.

A Reuters poll earlier this month indicated that all respondents expected the BOJ to raise interest rates to 0.5% by March.

This decision to maintain rates in December has intensified market focus on whether the next rate hike will occur in the January 23-24 meeting or the March review.

 

 

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.