Japan's core inflation for September rose to 2.1%, exceeding analysts' predictions. This increase stems from higher import costs linked to a weakening yen and the indirect effects of rising energy prices. Core inflation, which excludes fresh food prices, was up from 1.7% the previous month and aligned with expectations from economists surveyed by Reuters. Overall, headline inflation was also recorded at 2.1%, while 'core-core' inflation—excluding fresh food and energy—was noted at 2.4%.
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Abhijit Surya, senior APAC economist at Capital Economics, pointed out that the acceleration in inflation was significant, particularly as it occurred amid a notable slowdown in fresh food inflation and ongoing deflation in energy prices. Despite a 20.6% year-on-year drop in rice prices, overall goods inflation rose to 2.8%, up from August's 2.6%. Surya suggested that continuing indirect effects from previous energy price shocks have led to inflation in other industrial products rising to a 13-month high of 3.9%.
Although consumer energy prices fell by 0.6% in September, they have seen a general decline this year, largely due to subsidies from the Takaichi administration, even amid tensions related to the Iranian conflict. Japan's benchmark Nikkei 225 index dropped by 1.62% on Friday, while the yen strengthened to 156.15 against the dollar.
The rising inflation rate puts pressure on the Bank of Japan, which may consider another interest rate hike this year following a 25 basis point increase in September, raising rates to a three-decade high of 1.25%. With underlying inflation now above the target of 2%, further tightening is likely, with some forecasts indicating a potential hike in December.
Government data indicated that the inflation is primarily influenced by rising prices in durable goods and public utilities, while services inflation saw a slight increase from 1.2% to 1.5%. Finance Minister Satsuki Katayama addressed parliament, stating that Japan is approaching a sustained inflation period spurred by rising wages, even as he acknowledged the role of higher import costs in driving up prices.
Moreover, oil import expenses have escalated as Japan turns to pricier U.S. energy sources and moves away from Middle Eastern suppliers due to regional conflicts. When questioned about possible conflicts between government tax cuts and the central bank's inflation-fighting efforts, Katayama maintained that there is no disagreement between the government and the Bank of Japan.
The Lower House of Japan's parliament has initiated discussions on a bill to decrease the consumption tax on food from 8% to 1% for two years, which would also include support payments based on income levels.