Japan inflation cools to 2.1%, lowest since March 2022, but rice prices loom large ahead of election

• Core inflation fell to 2.4% and 'core-core' inflation eased to 2.9%, both showing significant cooling from previous months
• Rice prices remain elevated near record levels at 4,267 yen per 5kg bag despite rice inflation declining to 34.4% in December after peaking in May 2025
• Prime Minister Takaichi has proposed suspending the 8% food tax for two years and implemented a $135 billion stimulus package including subsidies for electricity and gas bills

Japan Inflation Eases to Multi-Year Low as Political and Monetary Pressures Mount

Key Data Points:

Japan's headline inflation cooled to 2.1% in December 2024, the lowest since March 2022, dropping from 2.9% in November. Core inflation (excluding fresh food) fell to 2.4%, while core-core inflation (excluding fresh food and energy) eased to 2.9% from 3%. Full-year 2024 inflation stood at 3.2%.

Rice Price Crisis:

Despite declining from peak levels, rice inflation remains elevated at 34.4% in December, marking the seventh consecutive monthly decline year-over-year. The average price of a 5-kilogram rice bag reached 4,267 yen (week ended January 11), near record highs. The 2025 rice shortage previously cost farm minister Taku Eto his position and pressured former PM Shigeru Ishiba.

Political Implications:

Prime Minister Sanae Takaichi is dissolving the Lower House today ahead of a snap election on February 8. Addressing cost-of-living concerns is central to her platform, including a proposed two-year suspension of the 8% food tax. Her government previously implemented a $135 billion stimulus package featuring local government grants and utility bill subsidies.

Monetary Policy:

The Bank of Japan is expected to announce its policy decision today, with Reuters-polled economists widely anticipating rates will hold at 0.75%.

Market Outlook:

Easing inflation provides relief but remains above the BOJ's 2% target for the fourth straight year. The combination of political pressure on living costs, persistent food price challenges, and upcoming elections creates uncertainty for monetary policy direction and fiscal spending priorities.