People make their way at a shopping district in Tokyo, Japan on Dec 23, 2022. (KIM KYUNG-HOON / REUTERS)

TOKYO — Japan's core consumer prices in December rose 4.0 percent from a year earlier, double the central bank's 2 percent target, hitting a fresh 41-year high and keeping alive market expectations the central bank could phase out ultra-low interest rates.

But analysts are divided on whether the Bank of Japan (BOJ) could raise rates this year, due to uncertainty on whether wages will increase enough to offset the hit to consumption from rising living costs and keep inflation sustainably around 2 percent.

The December increase in the core consumer price index (CPI), which excludes volatile fresh food but includes oil costs, matched a median market forecast and followed a 3.7 percent annual gain seen in November

"Companies aren't that cautious about raising prices any more. We might see inflation stay above the BOJ's 2 percent target well into autumn this year," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

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"But wages are key. If inflation stays around 2 percent and Japan sees significant wage hikes, the BOJ could normalise monetary policy. If it deems the pace of wage hike as insufficient, there's an equal chance it will stand pat," he said.

The December increase in the core consumer price index (CPI), which excludes volatile fresh food but includes oil costs, matched a median market forecast and followed a 3.7 percent annual gain seen in November. It was the fastest annual rise since December 1981, when the index also rose 4.0 percent.

The annual rise in core CPI exceeded the BOJ's 2 percent target for a ninth straight month, as prices rose for goods ranging from hamburgers and potato chips to air conditioners.

Core-core CPI, which strips away both fresh food and energy costs, was 3.0 percent higher in December than a year earlier, accelerating from a 2.8 percent gain seen in November.

A closer look at the data, however, shows that Japan has yet to face the risk of a wage-inflation spiral that has prodded US and European central banks to raise interest rates.

The main driver was energy prices, which were 15.2 percent higher in December than a year earlier, faster than a 13.3 percent increase seen in November.

READ MORE: Japan's wholesale inflation hits new high

Sign of slow wages growth

Among components of core CPI, prices of services were up just 0.8 percent in December on a year earlier, rising much more slowly than the 7.1 percent gain in goods prices - a sign of still-slow wages growth.

"Supply shock is behind the recent pick-up in inflation," said Yasunari Ueno, chief market economist at Mizuho Securities.

"It's therefore hard to see the BOJ raising its policy rate even under a new governor and deputy governor," who will assume their posts in April and March, respectively, he said.

Dai-ichi Life's Shinke expects core consumer inflation to accelerate further in January, before slowing due to the effect of government subsidies aimed at curbing utility bills.

The base effect of last year's sharp rise in consumer prices will also slow the pace of increase in inflation later this year, analysts say.

The BOJ kept monetary policy ultra-loose on Wednesday but raised its inflation forecasts in fresh quarterly projections, as companies continued to pass on higher raw material costs to households.

BOJ Governor Haruhiko Kuroda, whose term will end in April, has stressed the need to keep monetary policy ultra-loose until wages rise more, changing the recent cost-push inflation into inflation driven by robust domestic demand.

Reflecting intensifying labour shortages and accelerating inflation, more companies are announcing plans to lift pay, including the parent of casual clothing giant Uniqlo.

READ MORE: Japan yields break BOJ ceiling amid policy shift expectations

A Reuters poll on Thursday showed more than half of big Japanese firms planned to raise wages this year, although smaller firms, which employ the vast majority of Japanese workers, are less able to afford pay raises.

Many market players expect the central bank to eventually phase out yield curve control, a policy under which it caps long-term interest rates around zero, though they are divided on how soon that could happen.