dragged down by food and energy prices, Tokyo CPI fell more than expected in December, hitting a 14-month low

As the upward pressure from food and energy prices subsides, the inflation slowdown in Tokyo, Japan has exceeded market expectations. Although inflation figures have dropped sharply, core indicators remain above the Bank of Japan’s 2% target, indicating that the central bank’s current policy tightening path has not encountered substantial obstacles, and the trajectory for future interest rate hikes remains clear.

According to data released by Japan’s Ministry of Internal Affairs and Communications on Friday, Tokyo’s Consumer Price Index (CPI) excluding fresh food rose by 2.3% year-on-year in December, slowing significantly from the 2.8% increase recorded in the previous month. This reading came in well below economists’ prior forecast of 2.5%.

Serving as a leading indicator of national inflation trends, the Tokyo data signals that overall price pressures are easing. The headline inflation rate decelerated to 2% in December from 2.7% the previous month, while the underlying inflation gauge excluding energy also slowed to 2.6%.

The release of this data comes at a time when markets are closely scrutinizing Japan’s price trajectory, with investors seeking to gauge the exact timing of the Bank of Japan’s next policy move.

## Inflation Cools Broadly, but Core Inflation Remains Above Target

According to Bloomberg, the moderation in Tokyo’s inflation data is mainly driven by easing price pressures in food and energy sectors. As a leading indicator of Japan’s nationwide price trends, movements in the Tokyo CPI often foreshadow inflation dynamics across the country.

Despite the notable cooling in the headline figures, key indicators still stay above the Bank of Japan’s target range. This confirms that while price momentum has slowed, it has not deviated from the central bank’s fundamental assessment of the inflation environment.

## Expectations for Central Bank Tightening Remain Unchanged

The pullback in inflation data is unlikely to halt the Bank of Japan’s further interest rate hikes. Last week, the Bank of Japan’s Policy Board voted unanimously to raise its policy rate to 0.75%, the highest level since 1995.

In a briefing following the decision, Bank of Japan Governor Kazuo Ueda stated explicitly that the central bank has already lifted interest rates to a near 30-year high, and noted that it will continue to pursue monetary tightening if the inflation outlook aligns with expectations. However, he did not specify the pace of future rate hikes or the terminal rate level.

The latest data is broadly in line with the Bank of Japan’s baseline view that price pressures will gradually ease. In its latest policy statement, the central bank indicated that it expects inflation to reach the target level in the latter half of the forecast period ending in fiscal 2027. This implies that despite short-term fluctuations in the data, the long-term path for inflation to return to the target remains under the central bank’s control.

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