On January 10, inflation accelerated in Tokyo for the second consecutive month in December, with the consumer price index (CPI) excluding fresh food rising 2.4%, up from 2.2% the previous month. Japan's Ministry of Internal Affairs reported the data on Friday.Tokyo's economic data is often seen as a leading indicator of national trends.

At the same time, the labor market remained tight in November, with the unemployment rate unchanged at 2.5%, factory output declining less than expected monthly, and there was strong growth in September and October.Retail sales also exceeded expectations, showing some economic resilience.

Interest rate hikes depends on wages

Analysts said the data suggested that Japan's economy was recovering unevenly and that inflation trends were relatively stable.While extreme monetary stimulus is not necessary for continued economic expansion, there is no sign of an urgent need to raise interest rates next month.Konko Miya-Mae, senior economist at SMBC Nikko Securities, also said: "The Bank of Japan may make a choice between January and March, mainly depending on the development of wages."

In 2024, Japan will usher in the most important "Spring Fight" in 30 years.The results showed that the income of Japanese workers increased by 5.1%, the highest in history since 1991.At present, the Japan General Federation of Trade Unions (Rengo) has basically finalized the draft policy for requiring a salary increase of "more than 5%" in the 2025 "Spring Fight".

Drivers of accelerating inflation in Japan

The acceleration in inflation in Tokyo was mainly driven by a 13.5% increase in energy prices, which was the result of the phasing out of government subsidies for gas and electricity bills.The reading was the strongest performance since August, although it was slightly below economists 'expectations for a 2.5% increase.The subsidies lowered the overall price index by 0.31 percentage points in the previous month.From January to March, Prime Minister Shigeru Ishiba will restore these subsidies, which will distort inflation data in the future.Deeper inflation trends that exclude energy distortions show price growth slowing to 1.8% from 1.9% last month, suggesting that Japan does not have a high inflation problem that requires immediate action.

Japanese yen exchange rate and central bank decision-making

The yen against the U.S. dollar remained at around 157.55 after the release of the data and the release of opinions from the Bank of Japan's recent meeting, close to a five-month low.Further yen weakness could increase inflationary pressures by raising import costs.A weak yen is another factor the Bank of Japan may consider when deciding on its next move.If the exchange rate approaches 160, speculation about possible Japanese government intervention and a January rate hike could intensify.

Japan's economic stimulus plan and budget approval

To ensure that Japan can create a virtuous economic cycle maintained by stable price and wage growth and solid private consumption, Shigeru Ishiba last month launched a 21.9 trillion yen (US$139 billion) economic plan.Ishiba's government also approved an annual budget starting in April, totaling 115.5 trillion yen on Friday.However, his minority government still lacks enough support in parliament to pass the budget.A small opposition party has been negotiating with the government and is cautious about raising interest rates before March, which may make Shigeru Ishiba's government reluctant to fully support the Bank of Japan's January rate hike.