Japan’s core inflation unexpectedly surged to 2.1% in September, marking its highest level this year, fueled by a weak yen and rising import costs. This acceleration, alongside a 2.4% ‘core-core’ inflation (the Bank of Japan’s preferred gauge), intensifies pressure on the BOJ for further interest rate hikes, with economists forecasting another increase by year-end. Meanwhile, the Lower House is debating a bill to temporarily cut the food consumption tax to 1% to mitigate rising prices.
Japan's core inflation rate unexpectedly jumped to 2.1% in September, marking its highest point this year. This surge, which exceeded analysts' forecasts, is largely attributed to increasing import costs, exacerbated by a weakened yen, and the lingering indirect effects of higher energy prices.
Excluding fresh food prices, the core inflation figure aligns with Reuters' polled economist estimates and represents an acceleration from the previous month's 1.7%. The Bank of Japan's preferred inflation metric, 'core-core' inflation (which strips out both fresh food and energy costs), registered an even higher 2.4%.
Abhijit Surya, a senior APAC economist at Capital Economics, highlighted the significance of this acceleration, noting that it occurred despite a notable slowdown in fresh food inflation and ongoing energy deflation. While rice prices saw a substantial 20.6% year-on-year decline, it wasn't enough to prevent overall goods inflation from climbing to 2.8%, up from August's 2.6%. Surya suggested that the 'indirect effects of the energy shock' are still filtering through the economy, evidenced by 'other industrial products' inflation reaching a 13-month high of 3.9%.
Despite global conflicts, consumer energy prices in Japan actually decreased by 0.6% in September, primarily due to subsidies provided by the Takaichi administration throughout the year. On Friday, the benchmark Nikkei 225 index fell 1.62%, while the yen strengthened slightly to 156.15 against the dollar.
The persistent rise in inflation could prompt the Bank of Japan to implement another interest rate hike this year. This follows a 25 basis point increase in September, which pushed rates to a three-decade high of 1.25%, as the central bank gradually shifts away from its long-standing reflationary policies. With underlying inflation now consistently above the BOJ's 2% target, Surya anticipates a further tightening move in December.
Government data indicates that the inflation surge is predominantly driven by price increases in durable goods and public utilities charges. Services inflation also saw a slight uptick, rising from 1.2% to 1.5%.
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Finance Minister Satsuki Katayama informed parliament that Japan is 'on the cusp of shifting to a period of sustained inflation driven by rising wages,' acknowledging that increased import costs also play a role. Japan's oil import costs have climbed as the nation diversifies its energy sources towards more expensive U.S. suppliers, moving away from Middle Eastern sources due to the Iranian conflict. The weak yen further inflates the cost of these imports.
Addressing concerns that the government's proposed tax cut could conflict with the central bank's anti-inflation efforts, Katayama asserted, 'I see no gap between the view of the government and that of the BOJ.'
Concurrently, Japan's Lower House commenced debates on a bill to temporarily reduce the consumption tax on food from 8% to 1% for two years. Public broadcaster NHK reported that the bill also includes provisions for income-level-based support payments to workers, aiming to alleviate the impact of rising prices.
