Core inflation in Japan’s capital brings BOJ closer to a rate hike

[TOKYO] Core consumer inflation in Japan’s capital stayed well above the central bank’s 2 per cent target in November as firms continued to pass on rising costs mainly for food, data showed on Friday, reinforcing the case for a near-term interest rate hike.

Separate data for October showed retail sales and factory output rose while the jobless rate was steady at 2.6 per cent, suggesting the world’s fourth-largest economy was weathering the impact of higher US tariffs at least for now.

The slew of indicators will be among factors the Bank of Japan (BOJ) will scrutinise in deciding whether to raise interest rates in December, or hold off until next year.

“With the labour market still tight and inflation excluding fresh food and energy set to remain above 3 per cent for now, the Bank of Japan will resume its tightening cycle over the next couple of months,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

The Tokyo core consumer price index (CPI), which excludes volatile fresh food costs, rose 2.8 per cent in November from a year earlier, steady from October and roughly matching a median market forecast for a 2.7 per cent gain.

A separate index for Tokyo that strips away both fresh food and fuel costs - closely watched by the BOJ as a measure of demand-driven prices - rose 2.8 per cent in November from a year earlier, unchanged from the pace in October.

The increase in Tokyo CPI, a leading indicator of nationwide trends, was driven mostly by continued gains in food prices with the cost of rice up 38.5 per cent year-on-year, a bag of coffee beans 63.4 per cent higher and chocolate up 32.5 per cent.

Service-sector inflation stood at 1.5 per cent in November, largely unchanged from 1.6 per cent in October and much more moderate than a 4.0 per cent year-on-year gain in goods prices, the data showed.

The BOJ has said price rises must be driven by solid wage gains and robust domestic demand for inflation to durably hit its 2 per cent target, and meet the conditions for further rate hikes.

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But recent renewed declines in the yen may further push up food prices and broader underlying inflation, a point BOJ board member Asahi Noguchi made on Thursday in warning of the risk of waiting too long before raising rates.

Yen falls put focus on BOJ policy

Separate data released on Friday showed Japan’s factory output unexpectedly rose 1.4 per cent in October from the previous month due to robust automobile production.

But manufacturers surveyed by the government expect industrial output to fall 1.2 per cent in November and shrink 2 per cent in December, suggesting the hit from US tariffs could intensify in coming months.

The BOJ exited a decade-long, massive stimulus last year and raised interest rates to 0.5 per cent in January on the view Japan was on the cusp of sustainably hitting its 2 per cent inflation target.

While it has kept rates steady since then to gauge the economic impact of US tariffs, stubbornly high inflation has shifted opinion in the BOJ board to increasingly favour a hike.

Reflationist advisers of Prime Minister Sanae Takaichi have warned against an early rate hike, pointing to weak consumption and data showing Japan’s economy shrank in the third quarter.

But the yen’s recent slump to 10-month lows could help the BOJ make the case to hike rates soon, as doing so could prop up the currency and ease the burden on households from rising import costs, some analysts say. REUTERS