Core Inflation in Japan Hits 2% Target

By Leika Kihara

TOKYO (Reuters) – Core inflation in Japan's capital matched the central bank's 2% target in September, a sign of progress towards further interest rate hikes.

Political and overseas economic uncertainties might prompt the Bank of Japan (BOJ) to maintain its position in October. However, analysts say the solid inflation reading keeps market expectations alive for a rate hike in December or early next year.

Data showed that the Tokyo core consumer price index (CPI), excluding volatile fresh food costs, rose by 2.0% in September compared to the previous year, aligning with the BOJ's target and the median market forecast. This was a slowdown from a 2.4% increase in August, largely due to resumed government subsidies to curb utility bills. The Tokyo CPI is regarded as a leading indicator of nationwide prices.

Another closely watched index, excluding fresh food and fuel costs, increased by 1.6% in September compared to the previous year, matching the pace of August.

Service prices experienced a 1.2% increase in September after a 1.3% gain in August, indicating that companies were passing on rising labor costs from increased wages, as projected by the BOJ.

The focus is on whether service price increases will accelerate in October when Japanese firms typically revise prices biannually for goods and services.

Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute, stated, "With wages rising, companies may hike service prices, but there’s significant uncertainty about whether such moves will become widespread."

Weak exports and the recent rebound of the yen may deter manufacturers from significantly increasing wages next year, he added.

The BOJ ended negative interest rates in March and increased its short-term policy rate to 0.25% in July, believing Japan is steadily progressing towards a 2% inflation target.

BOJ governor Kazuo Ueda indicated that rates would continue to rise if inflation remains on track to meet the 2% target as projected, although he emphasized the need to gauge the impact of global economic uncertainties on Japan's fragile recovery.

In the second quarter, Japan's economy grew at an annualized rate of 2.9%, supported by consistent wage hikes that bolstered consumer spending. While capital expenditure is on the rise, soft demand in China and slowing U.S. growth jeopardize the outlook for the export-reliant economy.