Japan's core inflation data for October indicated that prices were still above the Bank of Japan's 2% target, with a key index excluding the impact of fuel showing an accelerated increase, putting pressure on the central bank to consider raising its interest rates. The rising service prices, closely monitored by the Bank of Japan (BOJ), indicated that firms might be passing on the escalating labor costs, setting the stage for potential rate hikes in the near future.
Economists are predicting that at its upcoming policy meeting in December, the BOJ may opt to increase short-term rates from 0.25% to 0.5% as part of the process of moving away from ultra-low rates. The recent weakening of the yen has heightened inflationary pressures by driving up import costs, leading to expectations among some market players for a rate hike in December, rather than waiting until January.
The core consumer price index in Japan, excluding fresh food prices but including oil products, rose by 2.3% in October compared to a year earlier, slightly surpassing market expectations. While there has been some slowdown in the rate of increase compared to previous months, particularly due to a base effect from the government's decision to reduce fuel subsidies last year, the overall trend remains upward. Factors such as the rebound in consumer spending, strengthening underlying inflation, and the weakening yen are bolstering the argument for another potential rate hike by the BOJ in the coming weeks.
The upcoming release of key data such as the Tokyo CPI figures in November and the central bank's business sentiment survey in December will provide further insight into the economic trends driving the BOJ's decision-making process. Despite positive indications supporting the case for rate hikes, concerns persist over challenges such as a significant increase in rice prices impacting food costs, uncertainties surrounding Chinese economic growth, and potential trade tensions due to higher tariffs under the new U.S. administration.