The yen firmed after the data, with the stronger-than-expected core-core reading giving it modest support in a USD/JPY range that has held between roughly 157 and 159 for most of October. A sustained move lower in USD/JPY would likely need confirmation from the BoJ next week, while the large trade deficit and the wide rate gap with the US continue to cap the yen’s gains. In bonds, the shorter maturities most sensitive to December hike pricing are the most exposed to a hawkish rethink after the JGB rally of recent weeks. Energy remains a key driver of the inflation outlook: oil prices above $110 a barrel are feeding import costs, and the BoJ is expected to raise its inflation forecasts partly for that reason. Electricity subsidies are still holding down the core figure, which suggests underlying pressure is firmer than the 2.1% headline implies.
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Japan’s inflation is back above the BoJ’s target and running hotter underneath, but the government’s refusal to declare an end to deflation shows policymakers are still treading carefully.
Summary:
- Japan’s core CPI (excluding fresh food) rose 2.1% from a year earlier in September, in line with forecasts and up from 1.7% in August. It is the first reading above the BoJ’s 2% target since December.
- Headline inflation also rose 2.1%, as expected, up from 1.9%.
- Core-core inflation (excluding food and energy), the measure closest to US core inflation, rose 2.4%, above forecasts of 2.3% and up from 1.9%.
- Economy Minister Minoru Kiuchi said conditions have not yet been met for the government to officially declare an end to deflation.
- The BoJ meets on October 29-30, when it is expected to hold rates at 1.25% but may signal that underlying inflation has roughly reached 2%.
- The yen firmed after the release.
Japan’s core consumer inflation rose back above the Bank of Japan’s 2% target in September for the first time since December, while a stronger-than-expected rise in underlying prices added to the case for another rate increase before year-end. The yen firmed after the release.
Core CPI, which excludes fresh food but includes energy, rose 2.1% from a year earlier, in line with forecasts and up from 1.7% in August. Headline inflation also rose 2.1%, as expected, from 1.9%. The more notable number was core-core inflation, which excludes both food and energy and is the closest Japanese equivalent to the US core measure. It rose 2.4%, above forecasts of 2.3% and up from 1.9% the previous month.
The data follow a much stronger reading from Tokyo earlier this month. Core inflation in the capital reached 2.7% in September and the ex-food and energy measure hit 3.0%, partly because some government support measures expired there. Nationally, electricity subsidies are still holding down household energy bills, which means the core figure understates the price pressure building in the rest of the economy.
The release strengthens the BoJ’s argument for continuing to raise rates. The central bank lifted its policy rate to 1.25% in September in a 7-2 vote, with the two dissenters arguing that inflation was still below target. Core inflation had stayed under 2% in each of the seven months to August. With both the core and core-core measures now above target, that objection is harder to sustain. Governor Kazuo Ueda told parliament this week that underlying inflation is very close to the 2% goal.
The BoJ is widely expected to keep rates on hold at its October 29-30 meeting. Reuters reported, citing sources, that the bank may raise its inflation forecasts because of persistently high oil prices and signal that underlying inflation has roughly reached 2%, keeping a December hike on the table.
The government struck a more cautious tone. Economy Minister Minoru Kiuchi said conditions have not yet been met for an official declaration that deflation is over. He said any such decision would weigh the CPI, the GDP deflator and the factors behind underlying inflation, to make sure Japan does not slip back into persistent price declines. Asked about reports that the BoJ may say underlying inflation has hit its target, he said he hopes the central bank guides policy appropriately, in line with its joint statement with the government on achieving stable and sustainable price stability.
The difference in tone matters. The BoJ is increasingly focused on keeping inflation anchored around 2% rather than generating it. The government, by contrast, remains wary of declaring victory over deflation too early, even with prices now rising faster than the central bank’s target.
Attention now turns to next week’s BoJ meeting and its quarterly outlook report. A clear statement that underlying inflation has reached 2% would push markets further towards pricing a December hike. A more hesitant message would leave the yen depending on intervention risk for support.
This article was written by Eamonn Sheridan at investinglive.com.