Japan’s inflation surged in January, with consumer prices rising 4% year over year—the highest level since early 2023.
This has intensified pressure on the Bank of Japan (BOJ) to tighten its ultra-loose monetary policy.
With inflation consistently exceeding the central bank’s 2% target for nearly three years, analysts are increasingly convinced that rate hikes may be imminent.
Core inflation, which excludes volatile fresh food prices, climbed to 3.2% from 3% in December, surpassing economists’ forecasts of 3.1%, according to a Reuters poll.
The so-called “core-core” inflation measure—stripping out fresh food and energy and closely tracked by the BOJ—also increased to 2.5% from 2.4% a month earlier.
Meanwhile, headline inflation remained elevated at 3.6% in December, marking its 34th consecutive month above the central bank’s target.
The inflation data fueled a slight strengthening of the yen, which gained 0.15% against the dollar to trade at 149.39.
Market sentiment suggests growing expectations of policy tightening, especially as BOJ officials have repeatedly signaled concerns over prolonged monetary easing.
The central bank’s summary of opinions from its January meeting underscored inflation risks and warned against the yen’s depreciation, noting,
“It will be necessary for the Bank to adjust the degree of monetary accommodation to avoid overheating financial activities and excessive reliance on loose policy.”
Adding to the rate hike debate, Japan’s latest GDP figures painted a mixed picture.
While fourth-quarter economic growth exceeded expectations—expanding 0.7% quarter on quarter and 2.8% on an annualized basis—full-year GDP growth for 2024 slowed to just 0.1%, a sharp drop from 1.5% in 2023.
Despite this slowdown, analysts argue that sustained inflation and a weak yen could push the BOJ toward its first rate hike in decades.
The Commonwealth Bank of Australia noted ahead of the inflation report that recent strong economic data has strengthened the case for an earlier rate hike.
Similarly, Bank of America analysts believe the BOJ is “likely growing more concerned” about inflation risks, which could accelerate policy shifts.
They predict the central bank will raise rates in June and December, ultimately lifting its terminal rate to 1.5% through additional hikes in 2026 and early 2027.
With inflationary pressures persisting and economic indicators reinforcing the case for policy tightening, markets are watching closely for the BOJ’s next move.
If inflation continues its upward trajectory, Japan’s historic era of negative interest rates could soon come to an end.
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