Japan: Inflation eases to lowest since March 2022 in December
Latest reading: Consumer prices were up 2.1% on a year-on-year basis in December, following a 2.9% rise in the prior month. December’s reading was the weakest since March 2022, but remained above the Bank of Japan’s 2.0% target for the 45th consecutive month.
The fall in inflation was largely due to easing price growth for rice, plus the introduction of new government subsidies for fuel.
Relative to the prior month’s data, there were reduced price pressures for transportation (+1.9% on a year-on-year basis vs +3.3% in November), food (+5.1% vs +6.1% in November) and energy (-3.1% vs +2.5% in November). In contrast, price pressures were higher for housing in December (+1.0% vs +0.9% in November).
Meanwhile, core consumer prices rose 2.4% in annual terms in December, following a 3.0% increase in the prior month.
Lastly, consumer prices declined 0.16% in December on a month-on-month basis, following a 0.34% increase in the prior month.
Outlook: Inflation should ease for the fourth quarter running in Q1 2026, before settling just below the Bank of Japan’s 2.0% target as a result of higher interest rates, a stronger yen and tepid oil prices.
Panelist insight: On the impact of the Prime Minister’s pledge to eliminate the 8% sales tax on food for two years, Goldman Sachs economists commented:
“If the tax cut is implemented, the core CPI (excludes fresh food) inflation rate could be pushed down temporarily by 1.4 pp. We model that the boost to consumption from a temporary increase in real income would be limited to about +0.2% to +0.3% (a +0.1 to +0.2 pp boost to GDP).”