The Bank of Japan raised interest rates again with the support of data! Japan's core inflation rate in December rose to 3%.

Just hours before the Bank of Japan announced its interest rate decision, the latest data showed that Japan's main inflation indicator reached 3% for the first time in 16 months, highlighting the continued upward momentum in Japanese prices. Data released by Japan's Ministry of Internal Affairs and Communications on Friday showed that due to rising energy prices, Japan's national core CPI rose 3% year-on-year in December, higher than the previous 2.7%. This data was in line with market expectations and marked the first time the indicator had reached 3% since August 2023. This acceleration was consistent with the trend in Tokyo's CPI for December last year. The data showed that Tokyo's core CPI, excluding fresh food, rose 2.4% year-on-year in December, higher than the previous 2.2% and the highest level since August of the previous year. Rising energy prices, following the gradual phasing out of natural gas and electricity subsidies, were the main driving force behind inflation in Tokyo. Looking at all of Japan, energy prices rose by 10.1% in December. Additionally, service sector inflation in Japan in December slightly accelerated to 1.6%, while the national core-core CPI, excluding energy costs and fresh food prices, rose 2.4% year-on-year in December, unchanged from the previous value. Stable inflation data supported the Bank of Japan's decision to raise interest rates on Friday. The market and economists widely expected the Bank of Japan to announce a rate hike a few hours later. This expectation had been building, especially after positive progress in wage increases indicated by senior Bank of Japan officials and relative market calm in the days following Trump's election. Atsushi Takeda, Chief Economist at the Itochu Research Institute, said: "This data gives the Bank of Japan solid confidence." "The Bank can confirm that there is no need to delay the rate hike." The latest surveys show that about three-quarters of economists surveyed expect the Bank of Japan to raise interest rates on Friday. Overnight index swaps indicate that the market has fully priced in a rate hike by the Bank of Japan in January. After the policy meeting on Friday, the Bank of Japan will release its quarterly economic outlook report. It is reported that Bank of Japan officials are expected to raise their basic inflation forecasts for the current and next fiscal year. In October of last year, the Bank of Japan forecasted that inflation excluding fresh food and energy would rise by 2% for the fiscal year ending in March and by 1.9% for the next fiscal year. Taro Kimura, economist at Bloomberg Economics, said: "The uptick in Japan's December inflation data will finally lead the Bank of Japan to agree to the market's widely expected rate hike today." Although the Bank of Japan is expected to lower interest rates on Friday, the yen may still face pressure, and rising import costs under a weaker yen will support inflation. For about a month now, the USD/JPY exchange rate has been around 155 yen to the dollar, reflecting expectations that interest rates between the US and Japan will remain significantly different for some time. Meanwhile, with weak wage growth, rising prices continue to put pressure on consumers, posing a significant challenge for Japanese Prime Minister Kishida Fumio. The latest quarterly household confidence report from the Bank of Japan showed that due to high living costs, Japanese households' inflation expectations have risen to their highest level on record. To mitigate the impact, the Kishida government has introduced an economic plan, including the reinstatement of utility subsidies from January to March and cash payments to low-income families. However, the reinstatement of subsidies may lead to another decline in inflation. The Japanese Diet is set to reconvene later on Friday. At that time, the Kishida government is likely to face a critical test of whether it can pass the initial budget for this year in a timely manner. The series of measures proposed by the Kishida government are expected to support future wage growth, a key component of the virtuous economic cycle that the Japanese government and the Bank of Japan have long sought.