Japan's Core Inflation Accelerates, Hits 16-Month High in December

Japan's core inflation rate has been on a steady upward trajectory, reaching a 16-month high in December 2024. The core consumer price index (CPI), which excludes fresh food but includes fuel costs, increased by 2.8% year-on-year, matching market expectations and posting the highest reading since February. This acceleration in core inflation, now well above the Bank of Japan's (BOJ) 2% target for over two years, supports the central bank's hawkish shift this year.



The BOJ has been raising interest rates in response to the persistent high inflation. In March and July 2024, the BOJ raised interest rates, signaling a hawkish shift in monetary policy. This tightening can lead to higher borrowing costs for companies, potentially impacting their profitability and stock valuations. However, it also indicates a strong economy, which can be positive for corporate earnings.



Sustained high inflation can erode companies' profit margins if they cannot pass on increased costs to consumers. However, it can also benefit companies that operate in sectors with pricing power, such as utilities or certain consumer goods. For instance, in November 2024, the core CPI rose by 2.7% y/y due to the government's reduction of electricity and gas subsidies, which led to higher energy prices. Companies in the energy sector might see increased earnings during such periods.



Different sectors will be affected differently by high inflation. In June 2024, the core CPI accelerated for the second straight month, reinforcing market expectations that the BOJ could raise interest rates. This could have a more significant impact on interest-sensitive sectors like financials and real estate. On the other hand, defensive sectors like utilities and consumer staples might be more resilient.

High inflation can create investment opportunities in companies that can adapt and thrive in a high-inflation environment. For instance, companies with strong pricing power, efficient cost structures, or exposure to sectors that benefit from inflation (like energy or commodities) might be attractive investments.

In conclusion, Japan's core inflation rate has been accelerating, reaching a 16-month high in December 2024. This persistent high inflation has led the BOJ to raise interest rates and adopt a hawkish monetary policy. While high inflation can impact companies' profitability and stock valuations, it also presents investment opportunities in sectors that can adapt and thrive in a high-inflation environment. Investors should consider the impact of high inflation on their investment strategies and focus on companies with strong earnings growth and robust business models.