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Inflation in Japan’s capital accelerates, keeps rate hike prospects intact

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Tokyo’s core consumer inflation accelerated in December, underscoring the ongoing pressure on household budgets and keeping the Bank of Japan’s policy normalization prospects alive. Core consumer prices in the capital, a key indicator of nationwide trends, rose 2.7% year-on-year, marking a sharp uptick from November’s 2.5% gain. This increase exceeded market forecasts, pointing to persistent inflationary pressures even as global energy prices ease.

The surge was driven largely by higher food prices and an uptick in services, highlighting how domestic factors are now fueling inflation, rather than external cost pressures. While utility bills showed signs of stabilizing due to government subsidies, fresh food prices jumped significantly, contributing to the strongest gains in the category in more than two years. Analysts note that these trends could weigh on household spending, complicating Japan’s recovery from the pandemic.

Despite rising inflation, the Bank of Japan has maintained its ultra-loose monetary policy, arguing that current price pressures are largely transitory. However, the latest data bolsters expectations that the central bank may shift its stance in the coming months, as inflation inches closer to the BOJ’s 2% target on a sustainable basis. Market watchers are increasingly pricing in adjustments to the BOJ’s yield curve control policy, which has already faced criticism for distorting bond markets.

Looking ahead, Japan’s inflation trajectory remains uncertain, with the pace of wage growth playing a critical role. While recent negotiations between major companies and unions hint at potential wage hikes to offset rising living costs, structural challenges in the labor market may limit gains. Economists warn that without sustained wage increases, Japan risks falling back into deflation once global inflationary pressures recede.

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