Japan: Japan’s inflation hits two-year high in January
Latest reading: Inflation rose to 4.0% in January from December’s 3.6%, marking the highest inflation rate in two years. Core inflation—the main gauge of prices used by the Bank of Japan—also rose, to 3.2% from 3.0%. Both measures for inflation were pushed up by a stronger increase in prices for food, whose supply has been limited by hotter summers, a plummeting yen and a shortage of labor. Annual average inflation rose to 2.9% in January (December: 2.7%).
Finally, consumer prices rose 0.52% in January over the previous month, slowing from the 0.59% rise recorded in December.
Outlook: The release of the January data comes just as employers and trade unions are concluding the “shunto”, Japan’s annual wage negotiations. Market analysts expect trade unions to secure a pay increase close to 2024’s rise, which was the strongest since the early 1990s. Japan may therefore be at a tipping point in its decades-long fight against deflation: Our panelists have raised their 2025–2028 inflation forecasts from 1.4–1.5% a year ago to 1.7–1.9%, just below the Bank of Japan’s 2.0% target.
That said, inflation should trend down in the coming quarters as the factors that ratcheted up price pressures over the past two years—higher commodity prices, a weaker yen, subzero interest rates and bumper pay increases—recede. In the near term, inflation will be further depressed by the government’s recent decision to reintroduce energy subsidies from January to March.
Panelist insight: Goldman Sachs analysts agree that Japan may have reached a tipping point:
“We believe the recent improvement in Japan’s economic performance (rising wages and prices since 2022, and positive domestic demand-led growth for the past three consecutive quarters) reflects the fact that the virtuous cycle envisioned by the BOJ, driven by a high-pressure economy resulting from population decline, is finally materializing.”