Japan's inflation trend becomes clear with the CPI announcement; what is the Bank of Japan's specific decision regarding interest rate determination?

With this week’s interest rate decision approaching, the release of Japan’s Consumer Price Index (CPI) is the market’s focal point. A significant decline in the inflation rate is expected for December, and the outcome is anticipated to have a substantial impact on the Bank of Japan’s policy decisions. As the inflation trend in the United States, a leading indicator of the global economy, also indirectly shapes Japan’s monetary policy environment, the CPI announcement in Japan holds extremely important significance.

December CPI Data Release Will Influence Interest Rate Decisions

Japan’s CPI statistics scheduled for mid-month will be published just before the Bank of Japan’s upcoming interest rate decision meeting. ING Securities analysts point out that a notable decrease in the inflation rate could serve as a critical consideration for the central bank’s policy stance. In particular, signs of easing inflation pressures that have persisted since 2024 are seen as a key turning point that could influence the direction of the current monetary tightening cycle.

Declining Inflation Rate May Lead to Policy Shift

Market participants generally believe that if the December inflation rate shows a larger-than-expected decline, the Bank of Japan is likely to reconsider its future interest rate hike plans. Easing inflation pressures challenge the necessity of additional monetary tightening. However, at the same time, comprehensive policy judgments considering overall supply and demand conditions in the economy will be required.

Wage Growth and Government Support Measures Support Core Inflation

On the other hand, Japan’s structural economic factors are complicating inflation trends. Sustained wage increases in the labor market and continued government economic support measures are expected to keep core inflation (excluding volatile food and energy prices) resilient at levels above 2%. The presence of this underlying inflationary pressure complicates the Bank of Japan’s policy decisions and highlights the difficulty of monetary policy.

Bank of Japan’s Focus for Additional Rate Hikes in the Second Half of 2026

The Bank of Japan aims to confirm that core inflation consistently remains above 2% and continues to outpace overall inflation trends. If this scenario materializes, it is highly likely that the Bank of Japan will proceed with further rate hikes sometime in the second half of 2026. Multiple variables—such as inflation data trends, wage negotiations, and government policy impacts—interact in this environment, and the next steps of the Bank of Japan will be determined within this context.