Japan's Inflation Gauge Rose 3%, Increasing Likelihood of BOJ's Rate Hike

 

On Friday, January 24, one of the Bank of Japan's main inflation measures when making the interest rate decision jumped up 3%, indicating the continuing trend of rising prices in Japan. In a few hours, the BOJ will begin a meeting to decide the interest rate.

 

Japan's Ministry of Internal Affairs announced on Friday that due to increasing energy prices, the consumer price index excluding fresh food climbed 3% YoY in December, up from 2.7% in November and meeting general expectations.

 

Higher energy prices have been a major contributor to Japan's inflation since Japan canceled gas and electricity subsidies. Nationally, energy prices in Japan rose 10.1% in December.

 

Besides this, Japan's service sector inflation also rose to 1.6%. An index that excludes energy costs and fresh food prices rose 2.4%, unchanged from November.

 

The steadily rising inflation data has increased the likelihood that the BOJ will give a rate hike later on Friday. Markets and economists generally expect the BOJ to raise the rate.

 

Itochu Research Institute chief economist Atsushi Takeda said the inflation data strengthened the BOJ's determination to raise the rate. The latest Bloomberg survey showed that about 75% of economists projected a rate hike on Friday. Markets have been adding to speculation about a rate hike.

 

The yen is likely to remain weak though Japan is expected to raise interest rates on Friday. For about a month, the yen has been trading around 155 yen or even lower against the dollar, reflecting expectations of a larger yen-dollar exchange rate.

 

The BOJ also plans to release its quarterly economic outlook report at Friday's meeting, which is said to raise its underlying inflation forecasts for the fiscal year and next.

 

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