Japan's core CPI maintained a high level of 3.0% in November, exceeding the target for 44 consecutive months and solidifying the central bank's rate hike path.

Japan’s core inflation rate remained steady in November, staying above the Bank of Japan’s target for the 44th consecutive month. This data further strengthened market expectations that the Bank of Japan will soon raise interest rates.

On Friday, December 19, data released by the Japanese government showed that the core consumer price index (CPI), excluding fresh food, rose by 3.0% year-on-year in November, in line with the median market forecast and unchanged from October. Meanwhile, the overall CPI’s year-on-year increase slightly fell from 3.0% last month to 2.9%. Both figures remain well above the Bank of Japan’s 2% target.

This data release comes as the Bank of Japan wraps up a two-day policy meeting. The market widely expects the central bank to raise its policy interest rate from the current 0.5% to 0.75%, which would be the country’s highest rate since 1995.

The market’s reaction to the data was generally positive. Following the release, strengthened expectations of a rate hike pushed the yen slightly higher against the dollar to around 155.73, and the Nikkei 225 index rose by 0.8%. Meanwhile, the yield on 10-year Japanese government bonds edged down to 1.958%.

Although Japan’s economic growth has contracted recently, persistent inflation data shows that the central bank must strike a balance between controlling prices and supporting the economy, to avoid acting too slowly in the face of high inflation.

Basic Price Pressure Persists

The data shows that while the overall inflation rate has edged down to 2.9%, sticky core inflation pressure remains significant.

Rising rice prices continue to be a key driver of inflation. Although rice inflation slowed for the sixth consecutive month to 37.1% (having doubled year-on-year in May this year due to supply shortages and rising import costs), food prices overall show little sign of slowing.

The index excluding fresh food and energy prices remained at 3.0%, indicating persistent underlying inflation. Analysts note that this trend strengthens the view that Japan’s inflation backdrop has fundamentally shifted away from its past two decades of deflation. The current inflation is driven not only by external energy market fluctuations but also by ongoing changes in corporate pricing behavior and domestic demand.

Normalization of Bank of Japan Policy Imminent

The CPI data was released just as the Bank of Japan’s policy meeting window opened. According to Reuters, with high food prices causing inflation to persist above the 2% target, more BOJ committee members have indicated they are prepared to vote in favor of a rate hike to address the risk of excessive inflation.

Last year, the Bank of Japan exited a decade of aggressive stimulus and raised the short-term rate to 0.5% in January, arguing that Japan is at the threshold of sustainably achieving the 2% inflation target.

The market’s expected rate hike to 0.75% will mark further progress toward policy normalization. Analysts warn that although raising rates helps curb inflation and prevent long-term yen weakness, the central bank needs to maintain a delicate balance between curbing inflation and avoiding excessive economic contraction, especially as consumer spending cools.

The Game Between Politics and Economic Growth

With expectations of tightening monetary policy, domestic discussion in Japan on economic growth and fiscal policy is heating up. Revised data shows that Japan’s third-quarter GDP shrank more than initially estimated, contracting at an annualized rate of 2.3%.

Against this backdrop, Prime Minister Sanae Takaichi told business lobbying groups on Wednesday that Japan must pursue aggressive fiscal spending to promote growth and tax revenue, rather than excessive fiscal austerity. An advocate of easy monetary policy, Takaichi has previously criticized the Bank of Japan’s rate hike moves.

In response, Bank of Japan Deputy Governor Masazumi Wakatabe told the same business group that the government must boost Japan’s “neutral interest rate” (the policy rate that balances economic growth and inflation) through fiscal spending and growth strategies. Wakatabe noted that if Japan’s neutral interest rate therefore rises, a BOJ rate hike would be natural. However, he emphasized that the central bank must avoid raising rates or withdrawing monetary support too early or too aggressively.

Currently, the Bank of Japan does not have an official neutral interest rate forecast; Governor Kazuo Ueda previously said it is difficult to estimate the terminal rate and the central bank anchors it between 1% and 2.5%.

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