Japan’s annual inflation rate climbed to 4.0% in January 2025, a two-year high, up from 3.6% in December 2024, according to the Statistics Bureau. This sharp increase intensifies pressure on the Bank of Japan (BoJ) to continue tightening monetary policy.
The primary driver of this surge was a significant rise in food prices, which jumped 7.8%, the steepest increase in 15 months. Fresh vegetables and other fresh foods were the largest contributors. Energy costs remained elevated, with electricity prices at 18.0% and gas prices at 6.8%. Additional upward pressure came from various sectors, including housing (0.8%), clothing (2.8%), transport (2.0%), furniture (3.4%), healthcare (1.8%), and miscellaneous items (1.4%).
Conversely, prices continued to decline in communication (-0.3%) and education (-1.1%).
Core inflation, excluding fresh food, reached a 19-month high of 3.2%, surpassing the consensus forecast of 3.1%. This figure further strengthens the likelihood of another interest rate hike by the BoJ.
For nearly three years, Japan’s inflation has exceeded the BoJ’s 2% target. In January, the central bank raised its benchmark interest rate by 25 basis points to approximately 0.5%, the highest level since the 2008 global financial crisis.
Japan’s economy demonstrated resilience, expanding at an annualized rate of 2.8% in the fourth quarter of the previous year, driven by robust business spending and consumer demand. This economic strength supports the BoJ’s rationale for further rate increases.
ING economist Min Joo Kang anticipates a 25 basis point rate hike in May. However, the potential for a sharp appreciation of the Japanese yen introduces uncertainty into the economic outlook. A Reuters poll indicates that a majority of economists expect the BoJ to implement another 25 basis point rate hike this year, likely in the third quarter, bringing the benchmark rate to 0.75%.
On a monthly basis, the Consumer Price Index (CPI) increased by 0.5%, following December’s 0.6% rise, which was a 14-month high.
