Japan's core CPI in November remains at a high of 3.0%, exceeding the standard for 44 consecutive months, solidifying the central bank's interest rate hike path

Japan's core inflation rate remained stable in November, exceeding the Bank of Japan's target for the 44th consecutive month, further solidifying market expectations for an imminent interest rate hike by the Bank of Japan.

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, matching the median market expectation and remaining unchanged from October. Meanwhile, the overall CPI year-on-year increase slightly decreased from 3.0% last month to 2.9%. Both figures continue to stay above the Bank of Japan's 2% target.

The release of this data coincided with the Bank of Japan's upcoming two-day policy meeting. The market widely expects the central bank to raise the policy interest rate from the current 0.5% to 0.75%, which would be the highest interest rate level in the country since 1995.

The market reacted positively to the data overall. Following the release, buoyed by strengthened expectations of an interest rate hike, the yen appreciated slightly 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 dipped slightly to 1.958%.

Despite recent contractions in Japan's economic growth, persistent inflation data indicates that the central bank must strike a balance between controlling prices and supporting the economy to avoid acting too slowly in response to high inflation.

Persistent Underlying Price Pressures

Data shows that although the overall inflation rate slightly decreased to 2.9%, the stickiness of core inflation pressures remains significant.

The rise in rice prices continues to be a key factor pushing up inflation. Although the rice inflation rate has slowed for the sixth consecutive month to 37.1% (having doubled year-on-year in May due to supply shortages and rising import costs), there are almost no signs of a slowdown in overall food price increases.

The index excluding fresh food and energy prices remains at 3.0%, indicating the resilience of underlying inflation. Analysts point out that this trend reinforces the view that Japan's inflation backdrop has fundamentally shifted from the deflationary environment of the past two decades. The current inflation is not only driven by fluctuations in external energy markets but also reflects ongoing changes in corporate pricing behavior and domestic demand.

The Bank of Japan's Policy Normalization is Imminent

The release of this CPI data coincides with the window period of the Bank of Japan's policy meeting. According to Reuters, given that high food prices keep inflation persistently above the 2% target, an increasing number of Bank of Japan committee members have hinted at their readiness to vote in favor of an interest rate hike to address the risks of excessive inflation The Bank of Japan exited its aggressive stimulus program last year after a decade and raised the short-term interest rate to 0.5% in January this year, believing that Japan is at a critical point for sustainably achieving the 2% inflation target.

The market expects an interest rate hike to 0.75% to mark further progress in policy normalization. Analysts warn that while interest rate hikes help curb inflation and prevent the long-term weakness of the yen, the central bank needs to maintain a delicate balance between controlling inflation and avoiding excessive suppression of the economy amid cooling personal consumption.

The Game Between Politics and Economic Growth

As expectations for tightening monetary policy rise, discussions within Japan about economic growth and fiscal policy are also heating up. Revised third-quarter GDP data shows that Japan's economy contracted more than initially estimated, shrinking at an annual rate of 2.3%.

In this context, Japanese Prime Minister Fumio Kishida stated to business lobbying groups on Wednesday that Japan must pursue active fiscal spending to promote growth and tax revenue, rather than excessive fiscal tightening. As a supporter of loose monetary policy, Kishida had previously criticized the Bank of Japan's interest rate hike measures.

In response, Bank of Japan Deputy Governor Masazumi Wakatabe told the same business group that the government must enhance Japan's "neutral interest rate" (the policy interest rate that balances economic growth and inflation) through fiscal spending and growth strategies. Masazumi Wakatabe pointed out that if Japan's neutral interest rate rises as a result, it would be natural for the central bank to raise interest rates, but he also emphasized that the central bank must avoid premature rate hikes or excessive withdrawal of monetary support.

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

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