Core Inflation in Tokyo Matches BOJ Target

By Leika Kihara

TOKYO (Reuters) – Core inflation in Japan’s capital met the central bank’s 2% target in September, indicating progress towards potential interest rate hikes.

Despite political and overseas uncertainties, the solid inflation figures may sustain market expectations for another rate hike in December or early next year, according to analysts.

The Tokyo core consumer price index (CPI), excluding volatile fresh food prices, rose 2.0% in September compared to the previous year, aligning with the Bank of Japan’s (BOJ) target and market forecasts. This figure showed a decline from August’s 2.4% growth, mainly due to government subsidies aimed at reducing utility bills. Tokyo’s CPI is a leading indicator for nationwide prices.

A complementary index, which excludes fresh food and fuel costs, increased 1.6% in September from a year earlier, consistent with August’s pace. Service prices also rose by 1.2% in September after a 1.3% increase the previous month, reflecting companies passing on rising labor costs due to wage hikes, as projected by the BOJ.

The upcoming months will reveal whether service price increases will become more widespread, especially as Japanese firms typically review prices for goods and services biannually in October.

Yoshiki Shinke, a senior executive economist at Dai-ichi Life Research Institute, noted, “With wages rising, companies may hike service prices, but there’s significant uncertainty on whether this will be widespread.” He expressed concern that weak exports and a recent rebound in the yen could hinder manufacturers’ profits and their willingness to raise wages in the next year.

The BOJ ended its negative interest rates in March and raised its short-term policy rate to 0.25% in July, believing Japan was making steady progress in achieving its 2% inflation target.

BOJ Governor Kazuo Ueda has indicated that the bank will continue to raise rates if inflation remains on track to achieve the 2% target as projected, while also taking time to assess the impact of global economic uncertainties on Japan’s fragile recovery.

Japan’s economy grew at an annualized rate of 2.9% in the second quarter, driven by steady wage increases supporting consumer spending. While capital expenditure continues to rise, soft demand from China and slowing growth in the U.S. raise concerns about the outlook for Japan’s export-dependent economy.