(Jan 24): Japan’s key inflation gauge hit 3% for the first time in 16 months, underscoring the nation’s sustained price momentum just hours before the central bank is expected to hike rates for a third time under governor Kazuo Ueda.

Consumer prices excluding fresh food rose 3% from a year earlier in December, accelerating from 2.7% in the previous month through higher energy costs, the Ministry of Internal Affairs reported Friday. The reading matched the consensus estimate and marked the first time it hit 3% since August 2023.

The acceleration was consistent with earlier inflation data for Tokyo, where higher energy prices were the primary driver following the phasing out of gas and electricity subsidies. Nationally, energy prices climbed 10.1% in December.

An index excluding energy costs and fresh food prices advanced 2.4%, unchanged from the pace in November.

The solid inflation data support the case for the Bank of Japan to raise interest rates later on Friday, a move widely anticipated by markets and economists. Speculation of a January rate hike has intensified especially after the BOJ top brass pointed to positive developments regarding wage hikes, and markets kept relatively calm in the first days of US President Donald Trump’s second term.

The latest Bloomberg poll showed that around three quarters of economists forecast a rate increase later Friday, while overnight-indexed swaps have suggested a January rate hike is almost fully priced in.

The BOJ is also scheduled to release its quarterly economic outlook report at the end of Friday’s meeting, where officials are said to upgrade their underlying inflation forecast for this fiscal year and next. In October, the bank projected that inflation excluding fresh food and energy would rise 2% in the current fiscal year ending in March, and 1.9% in the following year.

“A solid pickup in the national CPI inflation due Friday — a few hours before the BOJ’s rate decision — would push the central bank to proceed with another rate hike in January,” Bloomberg Economics said.

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