TOKYO: Japan's core consumer inflation exceeded the central bank's 2 per cent target in September for the first time in nine months, data showed on Friday (Oct 23), a sign of broadening price pressure that cements the case for a near-term interest rate hike.
The figures underscored how higher fuel costs from the prolonged Middle East conflict, elevated import prices driven by the weak yen and price pressures from robust AI demand were blunting the impact of government fuel subsidies.
Having just raised interest rates last month, the Bank of Japan is set to stand pat on policy next week but may revise up its inflation forecast and signal its readiness to keep pushing up still-low borrowing costs, sources have told Reuters.
"Core inflation is expected to accelerate due to rising energy costs from the Middle East conflict and subsequent second-round effects," said Masato Koike, a senior economist at Sompo Institute Plus.
"But with price rises not accelerating sharply, there's little need for a back-to-back rate increase in October," he said, projecting the BOJ's next hike to come in December.
The core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, rose 2.1 per cent in September from a year earlier, data showed, matching a median market forecast and accelerating from a 1.7 per cent rise in August.
An index that strips away the effects of both volatile fresh food and fuel, which is closely watched by the BOJ as a better gauge of demand-driven price pressures, rose 2.4 per cent in September from a year earlier after increasing 1.9 per cent in August.
In a sign of broadening inflationary pressure, goods prices rose 2.8 per cent year-on-year in September, accelerating from a 2.6 per cent gain in August, the data showed.
Services inflation also accelerated to 1.5 per cent in September from 1.2 per cent in the previous month, suggesting firms were passing on higher labour costs from a tight job market.
RISK OF HIGHER TERMINAL RATE
The data will be among factors the BOJ will scrutinise in producing fresh quarterly growth and price forecasts at next week's two-day policy meeting ending on October 30.
Sources have told Reuters the BOJ may signal that underlying inflation - or the broad price trend stripping away temporary, one-off factors - likely achieved 2 per cent, and stress its focus on anchoring inflation around the target.
Governor Kazuo Ueda said last week the BOJ won't tolerate any inflation overshoot, signalling resolve to continue raising rates after lifting them to a 31-year high of 1.25 per cent last month.
Recent surveys showed few signs past rate hikes were cooling loan demand, suggesting scope for further rate increases and drawing attention to the BOJ's assessment on lending conditions.
Many analysts polled by Reuters expect the BOJ to raise its policy rate to 1.50 per cent in December, and predict the terminal rate to be around 1.75 per cent or 2 per cent.
Marcel Thieliant, head of Asia-Pacific at Capital Economics, projects the BOJ to leave policy steady next week but signal continued concerns about upside risks to inflation.
"With little evidence that the tightening delivered so far has slowed the economy, the risks are shifting towards a higher peak in the policy rate than our forecast of 2 per cent," Thieliant said.