Inflation in Tokyo accelerated more than anticipated in November, while other economic data aligned with the Bank of Japan’s (BOJ) projections, heightening market speculation of a possible interest rate hike in December. The yen strengthened on the news, as policymakers weigh the implications of rising prices and a steady economic recovery.
Consumer prices excluding fresh food — the BOJ’s preferred gauge for Tokyo — increased by 2.2% in November compared to a year earlier, surpassing October’s rate of 1.8%, the Ministry of Internal Affairs reported Friday. The uptick reflects the winding down of government energy subsidies, combined with sustained increases in food prices. Overall inflation, which includes fresh food, rose to 2.6%, also beating economists’ expectations.
The removal of temporary energy subsidies, a policy initiated under former Prime Minister Fumio Kishida, played a significant role in the uptick. The subsidies had suppressed energy costs but were gradually phased out. While Kishida’s successor, Shigeru Ishiba, has announced plans to reintroduce the measure in January, its effects are expected to influence inflation data with a delay.
“The consensus-beating pickup in Tokyo’s November inflation is the latest sign consumer price pressures continue to build in line with the Bank of Japan’s outlook,” commented a Bloomberg Economics analyst. “The hotter core reading reflected a rise in utility prices after energy subsidies were rolled back.”
The yen rallied after the inflation report, strengthening from 151.34 against the dollar to as much as 150.01. This movement reflects market expectations that the BOJ might act at its next meeting on December 19. Overnight swap data suggests a 63% likelihood of a December rate hike, with projections having doubled this month.
Governor Kazuo Ueda has repeatedly emphasized that the BOJ will adjust borrowing costs if the economy performs in line with the central bank’s view. Speaking last week, Ueda hinted at a “live discussion” in the upcoming meeting regarding the possibility of raising the current 0.25% policy rate.
- Additional economic reports released Friday paint a mixed picture of Japan’s economy but generally support the case for policy tightening:
- Job Market: The jobs-to-applicants ratio rose to 1.25 in October, while the unemployment rate edged up to 2.5%. Despite the slight rise in joblessness, the labor market remains tight.
- Industrial Production: October saw a 3.0% increase in factory output compared to the previous month. However, forecasts predict declines of 2.2% in November and 0.5% in December, reflecting potential headwinds from global economic uncertainties.
- Retail Sales: Consumer spending remained subdued, with retail sales inching up by just 0.1% in October.
While the BOJ has indicated confidence in a moderate economic recovery, the tepid pace of consumption and potential external shocks, including geopolitical tensions and trade policies, remain concerns.
Prime Minister Ishiba’s government is working to counterbalance inflationary pressures with a fresh stimulus package, expected to receive cabinet approval later Friday. The measures aim to shield low-income households and bolster sectors critical to Japan’s economic resilience, such as semiconductors and artificial intelligence. Key components include:
- Cash handouts for low-income households
- Resumption of energy subsidies starting in January
- Investments in high-tech industries
The package seeks to mitigate inflation’s impact on consumers while sustaining economic momentum. However, analysts caution that global economic uncertainty could still weigh on Japan’s recovery trajectory.
Teikoku Databank reported Friday that food companies are planning price hikes for nearly 4,000 products in 2025, a significant increase over this year’s initial plans. This suggests that underlying inflationary pressures may persist, driven by rising costs in imported materials and supply chain disruptions.
The Tokyo Consumer Price Index (CPI) report is the last inflation data release before the BOJ convenes in December to decide on its benchmark interest rate. Economists believe the inflation data reinforces the case for a rate hike, particularly given the removal of subsidies and sustained cost pressures in essential goods.
“Overall, none of the economic data today stops the BOJ from mulling a rate hike,” said Taro Saito, head of economic research at NLI Research Institute. “If financial markets are calm, they could move in December.”
Bloomberg’s survey of economists indicates that over 80% expect another rate hike by January, underscoring the growing confidence that the BOJ is poised to shift away from its ultra-loose monetary policy stance.
Despite encouraging signs of economic recovery, Japan faces challenges from global economic uncertainties, including slowing growth in key trading partners and the potential impact of U.S. President-elect Donald Trump’s tariffs. Industrial production, a barometer of economic activity, fell 0.4% in the third quarter, and further declines are expected in the final months of the year.
Nevertheless, the broader economic outlook remains cautiously optimistic. The BOJ’s emphasis on a data-driven approach and its readiness to adjust policy if conditions warrant suggest a pragmatic stance.
“Japan’s economy is likely to continue a gradual recovery,” said NLI’s Saito. “Still, uncertainties from the global economy remain high.”
As the December BOJ meeting approaches, all eyes will be on Governor Ueda and his team, whose decision will likely signal the direction of Japan’s monetary policy in the coming months. Whether the central bank opts for a rate hike or maintains its current stance, the implications for markets, businesses, and consumers will be closely scrutinized.
