Japan's Core Inflation Slows, Bank of Japan on Track to Raise Interest Rates

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Japan's Core Inflation Slows, Bank of Japan on Track to Raise Interest Rates

Employees of seafood restaurants were seen working at Tsukiji Outer Market in Tokyo on February 15, showcasing the bustling activity in the city. Japan's core inflation, which includes oil products but excludes fresh food prices, reported a 2.4% rise in September from a year earlier, slightly lower than the 2.8% increase observed in August due to temporary subsidies introduced by the government to control gas and electricity bills, hinting at potential future impacts on inflation.

The Bank of Japan (BOJ) closely monitors an index that excludes the effects of fresh food and fuel, showing a 2.1% increase in September year-on-year, following a 2.0% gain in August, signaling a stable demand-driven price movement. Marcel Thieliant from Capital Economics predicts inflation, excluding fresh food and energy, to hover around 2% until early next year before gradually dropping below that threshold, suggesting a likelihood of another interest rate hike by the Bank of Japan before the year ends. The core consumer inflation in Japan has been above the BOJ's 2% target for an extended period, prompting the bank to raise short-term rates in attempts to stabilize inflation; however, Governor Kazuo Ueda highlighted the importance of monitoring global economic uncertainties impacting Japan's recovery.

The growth of Japan's economy by 2.9% in the second quarter was supported by steady wage increases that boosted consumer spending, yet concerns over soft demand in China and slowing U.S. growth remain looming. Governor Ueda emphasized the necessity for inflation to be driven by solid domestic demand and wage growth rather than escalating raw material prices for long-term sustainability. The focus now shifts to whether increased wages will lead companies to adjust service prices accordingly, as service inflation in Japan slowed to 1.3% in September, reflecting a modest response by companies to rising labor costs. The upcoming BOJ rate review is not expected to lead to a policy change at the end of October, with speculation arising around the possibility of rate hikes in December or in January, as economists remain divided on the timing of monetary decisions.