Inflation in Tokyo accelerates in December

The increase, driven by higher utility bills and food prices, supported market expectations that the Bank of Japan could raise short-term interest rates in the near term, though signs of economic weakness could temper the outlook.

Tokyo’s core consumer price index (CPI), which excludes fresh food, rose from a 2.2% annual increase in November.

An alternative measure, which excludes both fresh food and fuel costs, closely monitored by the BoJ, rose 1.8% in December, down from 1.9% in November.

Service prices increased 1% in December, marking a slight rise from 0.9% in the prior month, reflecting higher wages prompting firms to raise prices.

The figures are significant as Tokyo’s inflation trends often precede nationwide patterns, with the BoJ viewing sustained wage growth and the pass-through effect on service prices as critical for meeting its 2% inflation target - a key condition for additional rate hikes.

However, concerns about economic fragility remained, as factory output declined 2.3% in November, marking the first drop in three months.

That decline was driven by lower production of semiconductor equipment and automobiles.

While the BoJ ended its negative interest rate policy earlier in the year and raised its short-term rate to 0.25% in July, it had since held rates steady, with governor Kazuo Ueda emphasising the need for more data on wage trends and international developments before taking further action.

Market analysts were divided on the timing of the BoJ’s next move.

Some expected a rate hike at the 23-24 January policy meeting, while others anticipated a delay until March, citing subdued inflation momentum when utility costs are excluded.

All respondents in a recent Reuters poll predicted the BoJ would raise rates to 0.5% by March, with heightened focus on upcoming data releases and external economic factors.

Reporting by Josh White for Sharecast.com.