Tokyo Inflation Hits Largest Annual Increase of the Year in December Amid Gradual Energy Subsidy Withdrawal

---

---

The Tokyo area Consumer Price Index (CPI), a leading indicator of Japan’s inflation, experienced its largest annual increase in December due to the continued impact of energy subsidy reductions.

Tokyo’s CPI rose by 3.0% year-on-year in December, a significant acceleration of 0.5 percentage points from the previous month, marking the largest increase of the year, according to The Ministry of Internal Affairs and Communications of Japan on December 27.

This growth was driven not only by the gradual withdrawal of energy subsidies but also by a sharp rise in fresh food prices, which surged 17.9% year-on-year (prior: 9.7%). Among them, rice prices soared dramatically, posting a year-on-year increase of 62.9% (prior: 64.2%).

Excluding fresh food, the core CPI rose 2.4% year-on-year, an increase of 0.2 percentage points from the prior month. Meanwhile, the “core-core” CPI, which excludes both fresh food and energy, rose 1.8% year-on-year but declined by 0.1 percentage points compared to the previous month.

The services price, a key focus of the Bank of Japan (BoJ), increased by 1.0% year-on-year, up 0.1 percentage points from the previous month, marking the third consecutive month of growth. This reflects the upward pressure on service prices as companies adjust to prospects of continued wage growth.

On December 25, BoJ Governor Kazuo Ueda stated that the central bank would raise policy rates and adjust the level of monetary easing if economic and price conditions continue to improve. He emphasized that maintaining low interest rates amid economic recovery could risk excessively loose monetary policy.

When asked about the timing of a potential rate hike, Ueda reiterated his stance, highlighting that the outcome of the spring wage negotiations in March-April 2024 will be a crucial factor for Japan’s economy. On the global front, Ueda pointed to uncertainties surrounding the economic policies of U.S. President-elect Donald Trump.

Although Ueda’s comments during the BoJ’s December meeting indicated that the timing of the next rate hike would depend on domestic wage developments, prompting markets to delay expectations for the next hike until after March 2025, December inflation data for Tokyo and Ueda’s remarks on December 25 suggest that the BoJ could still take action as early as January.