Japan's core inflation remained above the Bank of Japan's (BOJ) 2% target in October, signalling continued pressure for the central bank to raise interest rates. The nationwide core consumer price index (CPI), which excludes fresh food but includes oil products, rose 2.3% from the previous year, slightly exceeding expectations. A separate index, excluding both fresh food and fuel, also rose 2.3%, up from 2.1% in September.
The rise in services inflation, which increased to 1.5% in October from 1.3% in September, suggests that firms are passing on higher labour costs. This is a key area the BOJ is watching, as it could signal the need for further rate hikes. Analysts now expect the BOJ to raise its short-term policy rate from 0.25% to 0.5% at its meeting on December 18-19.
The renewed weakness of the yen, which has raised import costs, adds to inflationary pressure. This, coupled with the rise in services inflation and consumer spending, strengthens the case for a rate hike. However, concerns about high food prices, particularly a spike in rice costs, and uncertainties about global economic conditions, including Chinese demand, may cloud the outlook.
The BOJ's next policy meeting in December will be crucial, with key data, including Tokyo's November CPI and the BOJ's quarterly business sentiment survey, set to influence its decision.
