Consumer prices excluding fresh food rose 3.2% from a year earlier in January, the biggest gain since June 2023, according to the ministry of internal affairs Friday. The acceleration was slightly faster than expected, and was pushed up by higher processed food prices including a record 70.9% jump in the cost of rice, the country’s staple food.
Overall inflation accelerated to 4% from 3.6% according to the ministry, hitting that mark for the first time in two years. Fresh food prices rising at the fastest pace in two decades also contributed to the acceleration in overall inflation, as vegetable prices including cabbage soared.
The report reaffirms Japan’s overall inflation as the highest among Group of Seven nations, underscoring BOJ board members’ recent comments about the need to watch upside risks. While Governor Kazuo Ueda has overseen three rate hikes in the space of a year, the continued strength in inflation could encourage speculation that the next hike will come sooner than expected. Economists surveyed last month saw the next increase in borrowing costs coming around July.
“Japan’s core inflation is likely to remain around 3% in the first half of this year,” said Taro Saito, head of economic research at NLI Research Institute. “The BOJ will keep mulling the timing of its next rate hike, rather than worrying about whether they need it.”
As traders reassess their views on the BOJ’s rate hike path, Japan’s benchmark 10-year bond yields have risen this month.
What Bloomberg Economics Says
“Another month, another hot Japan CPI report — and it all points to the Bank of Japan continuing to withdraw stimulus this year. Inflation momentum continued to build in January, fueled by soaring food prices and spillover effects on services.” — Taro Kimura, senior Japan economist
Hotter summers, a weak yen and labor shortage are among the driving factors feeding into the higher cost of food for households, as businesses continue to pass their rising price burden onto consumers. Major food companies in the country are planning on roughly doubling the number of products they’ll raise prices for this year compared to last year, according to a Teikoku Databank report released on Jan. 31.
Japan’s inflation has stayed at or above the BOJ’s 2% target now for nearly three years, likely having some more entrenched impact on household mindsets. The central bank raised its policy rate to 0.5% last month, bringing it to the highest level since the global financial crisis. The bank said it will keep raising the rate if its economic outlook is realized, a stance that has left traders asking when the next rate hike will come, not if.
Inflation continues to be a pressing issue for Prime Minister Shigeru Ishiba’s minority government as it faces the prospect of a national election that must be held by the end of July. In October Ishiba’s ruling party suffered its worst election result since 2009, an outcome that analysts attributed in large part to inflation.
Some 65% of surveyed households said they feel the burden of inflation “very much,” according to a poll by the Yomiuri newspaper and news network NNN this month. That jumped from 49% in the previous survey conducted in October 2023. With real wages rising just around 0.5%, consumer spending could weaken going ahead, after showing only a modest recovery.
In order to achieve a positive cycle of inflation, wage hikes and growth, Ishiba has called for robust pay increases again this year. Authorities will be closely watching the initial result of annual spring wage negotiations expected around the middle of next month. “With overall inflation at 4%, it’s a tough environment for households,” said NLI’s Saito.