Japan’s inflation cooled in December but remained well above target, keeping expectations of further BOJ tightening alive.
Summary:
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Core CPI slowed to 2.4% y/y in December, in line with forecasts
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Base effects from energy prices drove the deceleration
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Core-core inflation held firm at 2.9% y/y
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BOJ expected to keep rates steady at 0.75%
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Inflation backdrop supports gradual policy normalisation
Japan’s core consumer inflation slowed in December but remained comfortably above the central bank’s 2% target, reinforcing expectations that monetary policy will continue to normalise gradually even as near-term price pressures ease. Official data showed the core consumer price index, which excludes volatile fresh food costs, rose 2.4% year-on-year in December, matching market expectations and slowing sharply from November’s 3.0% pace.
The moderation largely reflected base effects linked to energy prices. A year earlier, inflation had been boosted by the expiration of government fuel subsidies, creating a high comparison point that mechanically dragged on annual price growth in December. As a result, the latest slowdown appears more technical than demand-driven, suggesting underlying inflation pressures remain intact.
That view was reinforced by measures of underlying inflation. The CPI index excluding both fresh food and fuel — often referred to as “core-core” inflation and closely monitored by the Bank of Japan — rose 2.9% year-on-year in December, easing only marginally from 3.0% previously. The persistence of this measure above target points to continued price momentum across domestically driven components such as services and labour-intensive sectors.
The inflation data arrive just ahead of the BOJ’s latest policy decision, with the central bank widely expected to keep its policy rate unchanged at 0.75% at the conclusion of its two-day meeting. Policymakers are nonetheless expected to reiterate their readiness to raise rates further should inflation and wage dynamics remain supportive. The BOJ ended its decade-long ultra-loose policy framework in 2024 and has since raised interest rates in several steps, including in December, on the assessment that Japan is making sustained progress toward achieving its inflation goal.
While headline inflation has cooled from recent highs, the broader economic backdrop continues to support a cautious tightening bias. Japan’s economy has shown signs of moderate recovery, wage growth has improved, and firms have continued to pass higher costs through to consumers. At the same time, policymakers remain mindful of downside risks from global growth uncertainty and financial market volatility.
Overall, the December CPI report supports the BOJ’s current approach: pausing in the near term while maintaining a clear bias toward further tightening if underlying inflation remains above target
