Inflation in Japan's capital, Tokyo, has reached its highest level in nearly a year, fueling expectations that the Bank of Japan (BOJ) may continue raising interest rates. Data released on Friday showed that the core Consumer Price Index (CPI), which excludes volatile fresh food prices, increased by 2.5% year-on-year in January. This marked an acceleration for the third consecutive month and exceeded the BOJ's 2% inflation target.
The Tokyo inflation data is widely seen as an early indicator of nationwide price trends, and the latest figures suggest that inflationary pressures remain strong. The BOJ recently raised its benchmark interest rate to 0.5%, the highest level since the 2008 global financial crisis. However, compared to other major central banks, Japan's interest rates remain significantly lower.
Rising costs for food, fuel, and various goods have put additional pressure on households, as prices continue to climb. However, inflation in services appears to be slowing, with prices increasing by just 0.6% in January compared to 1.0% in December. This raises questions about whether wage growth will be strong enough to encourage service-sector firms to pass on higher costs to consumers.
Another key inflation measure, which excludes both fresh food and fuel prices and is closely watched by the BOJ as an indicator of domestic demand, rose by 1.9% in January, up from 1.8% in December. This suggests that while cost-push inflation remains a concern, demand-driven inflation is still moderate.
BOJ Deputy Governor Ryozo Himino stated on Thursday that the central bank would continue to raise rates if economic conditions and inflation align with BOJ forecasts. This indicates that policymakers are closely monitoring wage growth and inflation dynamics to determine their next steps.
For forex traders, the BOJ's evolving stance on interest rates presents both opportunities and risks. A continued rate-hiking cycle could support the Japanese yen, influencing currency pairs like USD/JPY. However, uncertainty over wage growth and service sector inflation means that traders should closely follow upcoming BOJ policy decisions and economic data releases.
