Despite the inflation surge, Japan's annual GDP growth slowed to just 0.1% in 2024, a significant drop from the 1.5% growth recorded in 2023.

This inflation data supports the BoJ's argument for an interest rate hike to prevent yen depreciation and overheating in financial activities.

The BoJ anticipates further rate hikes in 2025, with board member Naoki Tamura suggesting a potential increase of 50 basis points to 1%.

Additionally, the inflation rate excluding fresh food prices increased by 3.2%, surpassing economists' expectations of 3.1%.

The recent inflation data follows stronger-than-expected fourth-quarter economic results, reinforcing the resilience of the Japanese economy.

Despite the inflationary pressures, Japan's GDP growth showed positive signs, rising from 0.7% to 2.8% on a quarterly and annualized basis.

However, government subsidies that previously helped mitigate inflation are expected to lose effectiveness, which may sustain high inflation levels.

Core CPI, which excludes fresh food and energy, rose to 3.8% year-on-year in January, marking a near two-year high and significantly exceeding the BoJ's 2% target.

The rise in inflation is largely attributed to robust consumer spending during the year-end holidays and ongoing increases in food prices.

In January 2025, Japan's consumer price index (CPI) inflation surged to a two-year high of 4.0% year-on-year, up from 3.6% in December 2024.

This increase in inflation moves Japan further away from the Bank of Japan's (BoJ) target of 2%, with inflation remaining above this goal for 36 consecutive months.

Wage growth throughout 2024 has been a key driver of the inflation rebound, with expectations of similar trends in the upcoming spring wage negotiations.