Japan’s core inflation rate in October remained above the Bank of Japan’s (BOJ) 2% target, bolstered by rising service prices and a weakening yen. This has intensified market speculation that the central bank may raise interest rates again in December, continuing its pivot away from years of ultra-low monetary policy.
Inflation Surpasses Expectations, Pressure Builds on BOJ
Government data released on Friday showed the nationwide core consumer price index (CPI), which includes oil products but excludes fresh food, rose by 2.3% in October compared to the previous year. This was slightly above market expectations of 2.2%, although marginally slower than the 2.4% increase recorded in September.
A separate, closely watched index that removes the impact of both fresh food and fuel showed an acceleration, rising by 2.3% from a year earlier, up from 2.1% in September. This metric is considered a more accurate indicator of demand-driven inflation and is a key focus for the BOJ as it gauges the impact of domestic economic pressures.
Service Prices Show Upward Momentum
Service prices, a crucial area of inflation that the BOJ monitors closely, rose by 1.5% in October compared to 1.3% in September. This uptick reflects the increasing willingness of firms to pass rising labor costs onto consumers.
Japan’s unique biannual pricing model for many services, which sees adjustments in April and October, adds further weight to this data. The October uptick signals that rising wages may be contributing to a gradual shift in pricing behavior across sectors.
Yen Depreciation Adds to Inflationary Pressures
The yen’s recent slide has further fueled inflationary pressures by making imports more expensive. Over the past two months, the yen has weakened considerably, leading analysts to anticipate prolonged upward price trends in imported goods.
“Although evidence of demand-driven price pressure remains scarce, the renewed yen depreciation over the past two months means upward pressure on prices will persist,” said Stefan Angrick, senior economist at Moody’s Analytics. Angrick expects the BOJ to hike rates in December rather than delay action until early 2024.
Market Anticipates December Rate Hike
The BOJ has already raised short-term interest rates from ultra-low levels to 0.25% this year as part of a broader policy shift. However, with inflation consistently exceeding the 2% target and signs of rising consumer spending, many economists believe the BOJ will further increase rates to 0.5% at its December 18-19 meeting.
A Reuters poll conducted earlier this month found that 56% of economists expect a rate hike in December, up from 49% in October. Analysts like Marcel Thieliant, head of Asia-Pacific at Capital Economics, argue that the renewed strength in underlying inflation and the recent recovery in consumer spending bolster the case for more tightening.
Balancing Risks Amid Economic Shifts
The BOJ faces a delicate balancing act as it considers its next move. While inflation data supports a shift in monetary policy, evidence of robust demand-driven inflation remains limited. Persistent inflationary pressures driven by external factors, such as the weakening yen, complicate the outlook for policymakers.
The BOJ’s December decision will hinge on several factors:
- Consumer Spending Trends: Recent rebounds in spending could support a rate hike.
- Labor Costs and Wages: Rising wages may signal greater room for firms to increase prices sustainably.
- Global Economic Conditions: Any significant shifts in major economies could influence the BOJ’s approach.
As Japan’s economy adjusts to this evolving landscape, the BOJ’s decisions in the coming months will be pivotal in shaping the country’s economic trajectory.
