By Megumi Fujikawa

TOKYO--Tokyo's consumer inflation cooled again in January, providing a fresh data point for the Bank of Japan as it weighs the timing of its next interest-rate hike.

Inflation signals have taken on more significance as yen weakness poses a risk to the central bank's efforts to generate healthy, demand-led price growth.

The Tokyo figures, which often foreshadow nationwide trends, showed price pressures easing at the start of 2026.

Overall consumer prices rose 1.5% from a year earlier in a significant slowdown from December's 2.0% increase, according to government data released Friday.

A key measure of underlying inflation--excluding volatile fresh food and energy prices--climbed 2.4%, slower than the 2.6% rise marked in the previous month.

While the BOJ does not disclose the specific data it uses to gauge underlying inflation, Dai-ichi Life Research Institute's estimates based on Friday's release suggest a broad deceleration across a variety of core price metrics.

"The cooling of prices should give the BOJ sufficient lead time before deciding on another rate increase," said Takuya Hoshino, an economist at the research firm.

However, the yen's dramatic depreciation threatens to shift the trajectory of domestic inflation, possibly forcing the BOJ to accelerate its policy action. Sustained yen weakness can boost prices of imports, straining households already dealing with rising living costs.

Last week, the Japanese central bank left its policy rate unchanged at 0.75% last week, after raising it to a three-decade high in December. BOJ Gov. Kazuo Ueda maintained a stance of seeking further monetary tightening and promised to pay closer attention to foreign-exchange fluctuations.

The yen recently approached 160 against the dollar due to fears that Japan's fiscal conditions may worsen if a ruling coalition win in an upcoming election clears the way for more expansive policy measures.

The Japanese currency was last trading around 153.70 to the dollar as warnings by currency authorities stoked speculation over potential intervention.

A weak yen may influence corporate pricing more than in the past now that companies are increasingly comfortable passing higher costs on to consumers, Ueda said.

Separate data on retail sales and unemployment gave some more insight into how inflation could affect consumption and labor market trends.

Amid rising prices, retail sales fell 0.9% in December from a year earlier, while the unemployment rate stood unchanged at 2.6%.

Japan's labor market is not as strong as commonly thought, Moody's Analytics economist Stefan Angrick said, noting that the jobless rate remains higher than the pre-pandemic average of 2.3%.

"A weak domestic economy, U.S. tariffs, and competition from abroad are squeezing hiring and pay gains, especially in manufacturing," he said.

Weaker hiring power would be a concern for the central bank, which has been carefully monitoring wage growth to ensure it keeps up with prices.

Another set of figures released Friday showed that industrial output remained in decline in the final month of 2025. However, December's 0.1% decline was a vast improvement from November's 2.7% decrease, and some economists continue to see better days ahead for Japan's economy.

"There are still reasons to be cautiously optimistic about the near term outlook in Japan," Capital Economics' Abhijit Surya said.

He notes that firms are predicting that industrial output will rebound in January, and even accounting for the headwinds posed by Chinese trade restrictions, it looks like industrial output is on track for a sizable increase in the first quarter.

Surya thinks that the BOJ won't fret over the recent weakness in economic activity and remains in a good position to resume tightening in the coming months.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

(END) Dow Jones Newswires

January 29, 2026 21:48 ET (02:48 GMT)

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