Japan’s core inflation rate for October has once again surpassed the Bank of Japan’s (BOJ) 2% target, driven by higher service costs and a weaker yen. This development has fueled widespread market speculation that the central bank is preparing to raise interest rates at its upcoming December meeting, marking a further shift from its long-standing ultra-low monetary policy.
Inflation Numbers Come in Hotter than Expected
Government data released on Friday revealed that the nationwide core consumer price index (CPI) rose by 2.3% in October from a year ago. This figure, which includes oil but excludes volatile fresh food prices, was slightly ahead of the 2.2% that most market analysts had predicted.
While this was a small dip from September’s 2.4% reading, another key metric showed underlying price pressures are building. The “core-core” index, which excludes both fresh food and fuel, accelerated to 2.3% from 2.1% the previous month. This particular index is watched very closely by the BOJ as a better gauge of domestic demand.
| Inflation Metric (Year-on-Year) | October 2023 | September 2023 |
| Core CPI | 2.3% | 2.4% |
| Core-Core CPI (Excl. Food & Fuel) | 2.3% | 2.1% |
| Service Prices | 1.5% | 1.3% |
The acceleration in the core-core index suggests that inflation is becoming more embedded in the economy and is not just a result of temporary factors like energy prices.
Service Prices and Weak Yen are Key Drivers
A significant factor in the latest report was the rise in service prices, which increased by 1.5% in October. This is a crucial indicator for the BOJ because it reflects whether rising wages are being passed on to consumers through higher prices for services.
The yen’s continued weakness is also adding to the problem. A weaker currency makes imported goods, from fuel to food, more expensive for Japanese consumers and businesses. Stefan Angrick, a senior economist at Moody’s Analytics, noted that this trend will keep upward pressure on prices and likely push the BOJ to act sooner rather than later.
Market Sentiment Leans Towards a December Hike
With inflation consistently staying above the central bank’s target, the financial markets are now largely anticipating another rate hike. The BOJ already moved rates from near-zero to 0.25% earlier this year, and many economists believe the next step is an increase to 0.5%.
This sentiment is backed by recent surveys. A Reuters poll from earlier this month found that 56% of economists expect the BOJ to raise rates at its December 18-19 policy meeting. This is up from 49% in a similar poll conducted in October, showing that conviction is growing among experts.
Analysts point to the strength in underlying inflation and a recent recovery in consumer spending as key reasons supporting the case for further monetary tightening.
The BOJ’s Careful Balancing Act
The Bank of Japan is in a challenging position. On one hand, the persistent inflation data calls for higher interest rates to cool the economy. On the other hand, policymakers are cautious about moving too aggressively and potentially harming the fragile economic recovery.
The decision in December will depend on a careful review of incoming data. Key factors the BOJ will be watching include:
- Consumer Spending: Whether the recent rebound in household spending is sustainable.
- Wage Growth: Evidence that rising wages are becoming more widespread, giving companies room to raise prices.
- Global Economic Outlook: Major shifts in the global economy, particularly in the U.S. and Europe, could impact Japan’s exports and overall growth.
As the meeting approaches, all eyes will be on the BOJ to see how it navigates these competing pressures to guide Japan’s economy forward.
Frequently Asked Questions
What is Japan’s current core inflation rate?
As of the latest data for October, Japan’s nationwide core consumer price index (CPI), which excludes fresh food but includes oil, rose by 2.3% compared to the previous year. This rate remains above the Bank of Japan’s 2% target.
Why is the Bank of Japan considering another rate hike?
The BOJ is considering another rate hike to combat inflation that has consistently stayed above its 2% target. Factors like rising service prices and a weak yen are creating persistent upward pressure on prices, prompting the central bank to consider tightening its monetary policy.
How does a weak yen affect inflation in Japan?
A weak yen makes imported goods more expensive. Since Japan relies heavily on imports for things like energy and food, a weaker currency directly translates to higher costs for both businesses and consumers, thus fueling inflation.
What is the market’s expectation for the next BOJ meeting?
A majority of economists and market analysts expect the Bank of Japan to raise its short-term interest rate at the December 18-19 policy meeting. The widely anticipated move would be an increase from the current 0.25% to 0.5%.
