The Japanese Ministry of Internal Affairs and Communications announced on Friday (January 23) that according to the data released, the core Consumer Price Index (CPI) in Japan in December 2025 slowed down slightly but remained above the Bank of Japan’s 2% target, raising market expectations for future interest rate hikes.
The data shows that the total consumer price index for December last year was 113.0 (based on 2020 as 100), an increase of 2.1% compared to the same period last year. Excluding the volatile prices of fresh food, the core CPI index was 112.2, showing a 2.4% year-on-year increase, consistent with the median market expectation, but significantly slowed down from the 3.0% increase in November.
Experts analyzed that the deceleration in inflation is mainly due to the base effect caused by the surge in energy costs last year, which was a result of the Japanese government’s halt to fuel subsidies.
Furthermore, the core CPI index, excluding fresh food and energy, stood at 111.5, up 2.9% from the same period last year. This index is closely monitored by the Bank of Japan as an important gauge to measure potential inflation pressures.
In its latest outlook report, the Bank of Japan raised its economic growth expectations for the fiscal years 2025 and 2026 and increased the forecast for core inflation in fiscal year 2026 from 1.8% three months ago to 1.9%, indicating its belief that the economy will continue to recover moderately, with price outlook risks remaining balanced.
On the same day (January 23), the Bank of Japan concluded a two-day policy meeting. Despite the repeated proposal for a rate hike by the Bank’s Policy Board member Hajime Takata for the second time in a row, without support from other members, the Bank of Japan ultimately decided to maintain the key policy interest rate at 0.75%.
Looking back at the policy trajectory, the Bank of Japan raised the rate from 0.5% to 0.75% in December 2025. The adjustment was made as Japan had made steady progress towards achieving its 2% inflation target. This marked the end of a massive decade-long monetary stimulus program in Japan, with a decision made to adopt a policy of gradual rate hikes.
Currently, the Bank of Japan remains cautious about the potential inflation impact of a weakened yen, believing that the yen’s trend could prompt businesses to pass on continuously rising import costs to consumers, thus potentially boosting underlying inflation. The core CPI is a crucial indicator in determining the timing of future rate hikes.
In a post-meeting press conference, Bank of Japan Governor Kazuo Ueda stated, “While business funding needs continue to grow moderately, it is still early to raise rates now because we raised them in December last year. We need time to assess the impact of the rate hike. Moreover, the lending attitude of banks is still active, and Japan’s financial environment remains loose.”
He went on to say, “We will carefully study the existing data at each policy meeting and update our views on economic and price developments, risks, and the likelihood of forecast realization. If our economic and price forecasts indeed materialize, we will continue to raise rates. The path and speed of rate hikes will depend on economic, price, and financial developments at the time.”
Additionally, the market has been closely monitoring the Bank of Japan’s next rate hike timing, but there have been changes in Japan’s political situation. This is because Prime Minister Sanae Takaichi announced on January 19 that there would be an early general election for the House of Representatives next month and promised to suspend the 8% food tax for two years.
Some market observers believe that these actions may trigger new market fluctuations and make the Bank of Japan’s quick rate hike decision more complex. Nevertheless, it is widely believed that as inflation data reflects Japan’s continued moderate economic recovery, the Bank of Japan is likely to continue preparing to raise rates and borrowing costs in the future.