Japan's inflation surged to a 19-month high in January, with core consumer prices rising 3.2% year-over-year, surpassing expectations and reinforcing speculation that the Bank of Japan (BOJ) may continue raising interest rates. The increase, driven by soaring food and energy costs, marks the third consecutive month of acceleration, keeping inflation well above the BOJ's 2% target.
The rise in core CPI, which excludes fresh food prices, edged past the 3.1% forecast by analysts and followed a 3.0% increase in December. A separate index that strips out both fresh food and energy costs-closely monitored by the BOJ-climbed to 2.5%, signaling broader inflationary pressures beyond volatile commodities.
A major factor behind the inflation spike was a 70.9% jump in rice prices, the largest increase since record-keeping began in 1971. Food prices overall, excluding perishables, surged 5.1% year-over-year, up from 4.4% in the previous month. The sharp rise has been attributed to supply shortages and higher production and transportation costs. Energy prices also saw a substantial increase of 10.8%, driven by rising gasoline costs following a reduction in government fuel subsidies.
Headline consumer inflation, which includes fresh food prices, hit 4.0% in January, up from 3.6% in December, marking the highest level in two years. Despite this, services inflation decelerated slightly, easing to 1.4% from 1.6% the previous month, highlighting that inflationary pressures remain concentrated in goods rather than services.
Bond markets reacted swiftly to the inflation data, with Japan's two-year government bond yield climbing to 0.83%, its highest level since 2008. The increase signals market expectations that the BOJ may need to act more aggressively to curb inflation.
BOJ Governor Kazuo Ueda has maintained that the central bank will continue to monitor inflation and wage trends closely before making further rate decisions. In January, the BOJ raised its short-term interest rate from 0.25% to 0.5%, marking its first hike in years as it signaled confidence in the economy's ability to sustain inflation above its target.
"While services inflation isn't accelerating that much, goods inflation isn't slowing either," said Ryosuke Katagi, a market economist at Mizuho Securities. "The BOJ will likely see scope to raise interest rates on the view price conditions are moving in line with its forecast."
The Japanese economy grew at an annualized rate of 2.8% in the final quarter of 2024, supported by strong business investment and consumer spending. Analysts expect continued wage growth to reinforce inflationary pressures, giving the BOJ further reason to tighten monetary policy. The central bank has repeatedly stated that sustained wage increases are crucial to ensuring inflation remains stable at its target level.
