| Consensus | Consensus Range | Actual | Previous | Revised | |
|---|---|---|---|---|---|
| CPI - Y/Y | 3.1% | 3.0% to 3.2% | 3.4% | 3.0% | 3.1% |
| Ex-Fresh Food - Y/Y | 2.5% | 2.4% to 2.6% | 2.5% | 2.4% | |
| Ex-Fresh Food & Energy - Y/Y | 1.9% | 1.8% to 2.0% | 1.9% | 1.8% |
Highlights
Consumer inflation in Tokyo, the leading indicator of the national average, accelerated further in all three key readings in January as protracted domestic rice shortages boosted the prices for processed food, the weak yen pushed up import costs and the plunge in temperatures triggered strong demand for heat pumps and other appliances. Gasoline prices rose and utility costs remained elevated after the government ended its temporary subsidies late last year.
The core reading (excluding fresh food) rose 2.5% on year after rising 2.4% in December and posting the fastest pace of increase in 11 months (since +2.5% in February 2024). The year-on-year rise in the total CPI jumped to a 22-month high of 3.4% (the highest since +3.5% in April 2023) from December's 3.1% (revise dup from +3.0%), also in light of a surge in fresh vegetable costs (the prices of cabbage tripled, those of regular jumped 73% and chocolate up 30%). The annual rate for the core-core CPI (excluding fresh food and energy) climbed to 1.9% after easing to 1.8% in December from 1.9% in November.
Energy costs rose 13.3% on year, adding 0.65 percentage point to the total CPI (vs. +0.66 point in December), while processed food prices gained 4.7%, lifting the index by 1.07 points (vs. +0.92 point). Mobile phone communications fees were unchanged after months of drops, making zero contribution to the CPI after plunging 11.2% and pushing it down by 0.04 point.
The Bank of Japan, which expects inflation to be anchored around its 2% target by early 2026, is on course for at least two more 25 basis point rate hikes that would take the overnight interest rate target to 1% by late 2025 or early 2026 as part of its gradual normalization process begun in March 2024 after more than a decade of large-scale easing.
At its two-day meeting that ended on Jan. 24, the BOJ's nine-member board, as widely expected, voted 8 to 1 to raise the policy interest rate by another 25 basis points (0.25 percentage point) to 0.5%. Citing"significantly low" real interest rates, the board repeated its latest conviction that it should be able to continue raising the target for overnight interest rates and"adjust the degree of monetary accommodation" without hurting economic activity.
The core reading (excluding fresh food) rose 2.5% on year after rising 2.4% in December and posting the fastest pace of increase in 11 months (since +2.5% in February 2024). The year-on-year rise in the total CPI jumped to a 22-month high of 3.4% (the highest since +3.5% in April 2023) from December's 3.1% (revise dup from +3.0%), also in light of a surge in fresh vegetable costs (the prices of cabbage tripled, those of regular jumped 73% and chocolate up 30%). The annual rate for the core-core CPI (excluding fresh food and energy) climbed to 1.9% after easing to 1.8% in December from 1.9% in November.
Energy costs rose 13.3% on year, adding 0.65 percentage point to the total CPI (vs. +0.66 point in December), while processed food prices gained 4.7%, lifting the index by 1.07 points (vs. +0.92 point). Mobile phone communications fees were unchanged after months of drops, making zero contribution to the CPI after plunging 11.2% and pushing it down by 0.04 point.
The Bank of Japan, which expects inflation to be anchored around its 2% target by early 2026, is on course for at least two more 25 basis point rate hikes that would take the overnight interest rate target to 1% by late 2025 or early 2026 as part of its gradual normalization process begun in March 2024 after more than a decade of large-scale easing.
At its two-day meeting that ended on Jan. 24, the BOJ's nine-member board, as widely expected, voted 8 to 1 to raise the policy interest rate by another 25 basis points (0.25 percentage point) to 0.5%. Citing"significantly low" real interest rates, the board repeated its latest conviction that it should be able to continue raising the target for overnight interest rates and"adjust the degree of monetary accommodation" without hurting economic activity.
Market Consensus Before Announcement
Consumer inflation in Tokyo, the leading indicator of the national average, is expected to inch up further in all three key readings in January. Three-month utility subsidies for peak time air conditioner use ended in November (bills were paid in December) while processed food prices remained high in protracted rice shortages.
The core reading (excluding fresh food) is forecast to post a 2.5% increase on year after rising 2.4% in December. The year-on-year rise in the total CPI is also expected to rise to 3.1% from 3.0%. The annual rate for the core-core CPI (excluding fresh food and energy) is estimated at 1.9%, up from 1.8%.
The Bank of Japan, which expects inflation to be anchored around its 2% target by early 2026, is on course for at least two more 25 basis point rate hikes that would take the overnight interest rate target to 1% by late 2025 or early 2026 as part of its gradual normalization process begun in March 2024 after more than a decade of large-scale easing.
At its two-day meeting that ended on Friday, the BOJ's nine-member board, as widely expected, voted 8 to 1 to raise the policy interest rate by another 25 basis points (0.25 percentage point) to 0.5%. Citing"significantly low" real interest rates, the board repeated its latest conviction that it should be able to continue raising the target for overnight interest rates and"adjust the degree of monetary accommodation" without hurting economic activity.
The core reading (excluding fresh food) is forecast to post a 2.5% increase on year after rising 2.4% in December. The year-on-year rise in the total CPI is also expected to rise to 3.1% from 3.0%. The annual rate for the core-core CPI (excluding fresh food and energy) is estimated at 1.9%, up from 1.8%.
The Bank of Japan, which expects inflation to be anchored around its 2% target by early 2026, is on course for at least two more 25 basis point rate hikes that would take the overnight interest rate target to 1% by late 2025 or early 2026 as part of its gradual normalization process begun in March 2024 after more than a decade of large-scale easing.
At its two-day meeting that ended on Friday, the BOJ's nine-member board, as widely expected, voted 8 to 1 to raise the policy interest rate by another 25 basis points (0.25 percentage point) to 0.5%. Citing"significantly low" real interest rates, the board repeated its latest conviction that it should be able to continue raising the target for overnight interest rates and"adjust the degree of monetary accommodation" without hurting economic activity.
Definition
The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Annual changes in the CPI represent the rate of inflation.
The Tokyo CPI data covers consumer prices in the capital’s 23 wards located in the eastern part of the Tokyo Prefecture but excludes the 26 cities and other smaller municipalities that occupy larger areas in other parts of the province (islands in the Pacific Ocean are also excluded). It is a leading indicator of the national average CPI as it is released about a month ahead of the national data. The survey for the Tokyo CPI is conducted on one day around the 12th (Wednesday, Thursday or Friday) each month and its results are released toward the end of the same month or early in the following month.
The national CPI has a larger energy weight of 712 out of 10,000, compared to 470 in the Tokyo data, because the shares of consumption of electricity, gasoline and heating oil tend to be bigger in the rural areas. There is only a slight difference in the weighting of food excluding perishables between the national data (2,230) and the Tokyo data (2,144).
The Tokyo CPI data covers consumer prices in the capital’s 23 wards located in the eastern part of the Tokyo Prefecture but excludes the 26 cities and other smaller municipalities that occupy larger areas in other parts of the province (islands in the Pacific Ocean are also excluded). It is a leading indicator of the national average CPI as it is released about a month ahead of the national data. The survey for the Tokyo CPI is conducted on one day around the 12th (Wednesday, Thursday or Friday) each month and its results are released toward the end of the same month or early in the following month.
The national CPI has a larger energy weight of 712 out of 10,000, compared to 470 in the Tokyo data, because the shares of consumption of electricity, gasoline and heating oil tend to be bigger in the rural areas. There is only a slight difference in the weighting of food excluding perishables between the national data (2,230) and the Tokyo data (2,144).
Description
The CPI has been in the spotlight as Japan struggled to make its way out of deflation. It is now closely monitored because the recent spike in energy and commodity markets and supply chain constraints during the global pandemic boosted Japan’s inflation rate to the highest in over four decades in 2022.
The report tracks changes in the price of a basket of goods and services that a typical Japanese household might purchase. The preferred measure is the year over year percent change. Markets will typically pay more attention to the core measure that excludes only fresh food because volatile food prices can distort overall CPI. A second core measure that excludes energy as well is also available. As the most important inflation indicator, the CPI data are closely monitored by the Bank of Japan. Rising consumer prices may prompt the BoJ to raise interest rates in order to manage inflation and slow economic growth. Higher interest rates make holding the yen more attractive to foreign investors, and this higher level of demand will place upward pressure on the value of the yen.
An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets and your investments.
Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to government securities. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities and your portfolio, often in a dramatic fashion.
By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.
The report tracks changes in the price of a basket of goods and services that a typical Japanese household might purchase. The preferred measure is the year over year percent change. Markets will typically pay more attention to the core measure that excludes only fresh food because volatile food prices can distort overall CPI. A second core measure that excludes energy as well is also available. As the most important inflation indicator, the CPI data are closely monitored by the Bank of Japan. Rising consumer prices may prompt the BoJ to raise interest rates in order to manage inflation and slow economic growth. Higher interest rates make holding the yen more attractive to foreign investors, and this higher level of demand will place upward pressure on the value of the yen.
An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets and your investments.
Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to government securities. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities and your portfolio, often in a dramatic fashion.
By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.
