^{Photo: Bloomberg.com}

Japan’s inflation rate cooled sharply in December, offering some relief to households and policymakers, but persistently high food prices, especially rice, remain a flashpoint as the country heads into a snap general election and the central bank weighs its next policy move.

Government data showed headline consumer inflation slowed to 2.1 percent in December, down from 2.9 percent in November and marking the lowest reading since March 2022. Despite the slowdown, inflation has now remained above the Bank of Japan’s 2 percent target for 45 consecutive months, underscoring how deeply price pressures have become embedded in the economy.

Core inflation eases but remains elevated

Underlying price measures also showed signs of moderation. Core inflation, which excludes fresh food, eased to 2.4 percent year on year, its lowest level since October 2024 and sharply below November’s 3 percent reading. The figure came in broadly in line with market expectations.

The so-called core-core measure, which strips out both fresh food and energy, slipped slightly to 2.9 percent from 3 percent a month earlier. While the trend suggests inflationary momentum is easing, these levels remain well above historical norms in a country long accustomed to near-zero inflation.

For the full year, Japan’s inflation averaged 3.2 percent. Prices peaked at a two-year high early in 2025 before gradually decelerating as energy costs stabilized and import-driven inflation softened.

Rice prices remain a political pressure point

Food inflation continues to shape public sentiment, with rice prices drawing particular attention. Although rice inflation has been easing on a year-on-year basis, it remains exceptionally high. In December, rice prices were still up 34.4 percent from a year earlier, marking the seventh straight month of deceleration but still among the steepest increases in decades.

Crucially for consumers, prices remain near record levels. Data from Japan’s agriculture ministry shows the average price of a 5-kilogram bag of rice stood at 4,267 yen in mid-January, far above pre-spike norms.

The issue carries political weight. In 2025, surging rice prices reached their highest level in more than 50 years, contributing to a public backlash that led to the resignation of then agriculture minister Taku Eto. The episode also forced the government at the time to intervene directly as shortages and price spikes strained household budgets.

Goods inflation still driving overall prices

Economists caution that Japan’s inflation story is far from resolved. While energy and import prices have cooled, goods inflation remains the dominant force keeping overall inflation elevated.

Analysts note that a stronger yen helped slow import costs earlier in 2025, but that trend has since stalled. As a result, price pressures for everyday goods could persist longer than policymakers anticipate, especially if currency weakness re-emerges.

That dynamic raises the possibility that inflation could remain above the BOJ’s target for an extended period, even as headline numbers soften. Some economists argue this could justify another interest rate hike as early as April if wage growth and consumer spending hold up.

Election timing raises the stakes

The inflation data lands at a sensitive political moment. Prime Minister Sanae Takaichi dissolved Japan’s Lower House on Friday, formally triggering a snap election scheduled for Feb. 8.

Takaichi has placed the cost of living at the center of her campaign, pledging to suspend Japan’s 8 percent food consumption tax for two years as a way to ease pressure on households. The proposal is aimed squarely at voters grappling with stubbornly high grocery bills despite the recent easing in headline inflation.

Her government has already taken an aggressive fiscal stance. Last year, it rolled out a stimulus package worth roughly $135 billion, including expanded grants to local governments and subsidies to offset electricity and gas bills.

Central bank outlook remains cautious

On the monetary policy front, the Bank of Japan recently held its benchmark interest rate at 0.75 percent and slightly raised its inflation forecast for the 2026 fiscal year to 1.9 percent, up from 1.8 percent previously.

The BOJ continues to emphasize a gradual approach to policy normalization, stressing the need for sustained wage growth and stable demand before tightening further. However, with inflation still above target and politically sensitive food prices in focus, the central bank faces a delicate balancing act.

As voters head to the polls and policymakers assess the next steps, Japan’s cooling inflation offers some reassurance, but the lingering impact of high food costs ensures that the battle over living standards remains firmly at the heart of the national conversation.

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