Faster Tokyo inflation supports BOJ rate hike case, lifts yen

[TOKYO] Inflation in Tokyo rose at a faster pace, supporting the case for the Bank of Japan (BOJ) to keep raising interest rates gradually and giving the yen a boost.

Consumer prices excluding fresh food gained 2.8 per cent in October from a year earlier in the capital, according to the Ministry of Internal Affairs and Communications on Friday (Oct 31), with the main driver being water charges. The median economist estimate in a Bloomberg survey was for a 2.6 per cent increase after the gauge rose 2.5 per cent in September.

The pace of price gains has stayed at or above the BOJ’s 2 per cent target for three and a half years, though BOJ governor Kazuo Ueda maintains that the underlying trend is still some way from reaching that goal. In the latest month, inflation barring fresh food and energy gained 2.8 per cent, picking up from 2.5 per cent in the previous month. Overall inflation also registered 2.8 per cent growth.

The yen rose to 153.84 versus the US dollar after the data were released, versus around 154.17 shortly before.

Prime Minister Sanae Takaichi aims to soften the blow of rising prices to consumers and companies with fresh economic measures. The new leader has promised to cut the petrol tax during the current diet session, bring down electricity and gas costs during the winter, and deliver additional grants for regional governments while raising the ceiling on tax-free earnings.

With city-wide subsidies for water having run their course, costs for water were flat in October versus a year earlier. In September, the subsidies led to a decline of 34.6 per cent for those costs. Prices for energy and processed food nudged lower.

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While the Tokyo CPI report is a leading indicator for national trends, isolated subsidies affecting only the capital can sometimes distort that dynamic.

In other data, industrial production rose 2.2 per cent in September from August, beating the consensus estimate of 1.5 per cent growth, while rising 3.4 per cent from a year earlier. Meanwhile, retail sales advanced 0.3 per cent in September versus the prior month and rose 0.5 per cent year on year.

The jobless rate held steady at 2.6 per cent and the job-to-applicant ratio stayed at 1.20 in September, meaning there were 120 jobs offered for every 100 applicants.

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Unlike in the US, where the central bank faces political pressure to change interest rates, in Japan, the BOJ has not faced much open pressure on policy. Takaichi, who is known as an advocate of monetary easing, has not made any explicit demands on the BOJ since becoming premier, though she drew attention in September 2024 when she declared it would be “stupid” to lift interest rates.

The BOJ held its benchmark interest rate unchanged on Thursday. Prior to the decision, BOJ watchers in a Bloomberg survey pushed back their forecast for the next interest rate hike timing. Around half see December as the most likely month when the next hike might come. BLOOMBERG