Tokyo December CPI unexpectedly accelerated, supporting expectations for the Bank of Japan to raise interest rates again.

As the Japanese government temporarily cancels utility subsidies, inflation in Tokyo accelerated for the second consecutive month in December, which may support expectations of a rate hike next year. The Japanese Ministry of Internal Affairs announced on Friday that the core CPI in Tokyo, excluding fresh food, rose by 2.4% year on year in December, higher than the 2.2% increase in the previous month. This is the highest level since August of last year, although slightly lower than the economists' expected growth of 2.5%. Overall CPI in Tokyo rose by 3% year on year in December, higher than the expected 2.9% and the previous value of 2.6%. This acceleration in growth is mainly due to the rising energy prices after gradually cancelling subsidies for natural gas and electricity. The index dropped by 0.31 percentage points compared to a month ago. Data from Tokyo serves as a leading indicator reflecting the national trend in Japan. Another set of data shows that the job market was relatively tight in November, while industrial output declined month on month after strong growth in September and October. Retail sales exceeded expectations. Although the increase in inflation is mainly due to the reduction in subsidies, the data suggests that price increases remain stable, which may prompt the Bank of Japan to consider raising rates in the coming months. Bank of Japan Governor Haruhiko Kuroda reiterated the central bank's position on Wednesday, stating that the central bank will adjust the degree of monetary easing based on the development of economic activity, prices, and financial conditions. While there is room for a rate hike in January, some market participants and economists have begun to adjust their predictions of a rate hike to March. Employment data shows that the job market remains tight, putting pressure on businesses to raise wages to retain and attract employees. Data from the Japanese Ministry of Health, Labour, and Welfare shows that the ratio of job openings to applicants remained unchanged at 1.25 in November, with the unemployment rate staying at 2.5%. Additionally, official reports indicate that industrial output in Japan declined by 2.3% from the previous month in November, while retail sales grew by 1.8%. Bloomberg economist Taro Kimura said, "The strong rebound in this early national CPI indicator will align with the Bank of Japan's assessment that inflation is beginning to hover around the 2% target. We expect the Bank of Japan to raise its target interest rate from 0.25% to 0.50% in January, followed by further hikes of 25 basis points in April and July, bringing it to 1.0%."