The Zhitong Finance App learned that according to a recent survey released on Friday, the impact of the Middle East war continues to ferment, and Japan's core consumer inflation rate for October, which will be announced next Friday (November 20), is expected to exceed the Bank of Japan's 2% target for the second consecutive month. According to reports, this survey of 16 economists shows that Japan's national core CPI, which excludes fresh food but includes energy items, is expected to rise 2.3% year-on-year in October, the highest level since December last year, which also means that Japan's core inflation rate will continue to exceed the Bank of Japan's target.
Ryosuke Katagi, a market economist at Mizuho Securities, said, “Affected by the situation in the Middle East, we expect that prices of food, excluding rice, and daily necessities will continue to rise strongly.”
According to data released last month, Japan's core CPI rose 2.1% year on year in September, in line with economists' expectations. It surpassed the Bank of Japan's 2% target for the first time in nine months, and also higher than 1.7% in August. Another indicator that better reflects potential inflation trends — the core-core CPI after excluding fresh food and energy — rose 2.4% year over year in September, up from 1.9% in August, indicating that price pressure is spreading to more sectors.
The Middle East conflict continues to drive up energy costs, and the weakening yen raises import prices, causing Japan, an economy that is highly dependent on energy and food imports, to face greater inflationary pressure. Strong demand for artificial intelligence (AI) has also brought additional price pressure, weakening the buffering effect of government fuel subsidies on consumer costs.
Service prices are an important indicator for observing whether inflation can continue. Service prices in Japan rose 1.5% year on year in September, up from 1.2% in August, the fastest growth rate since March, reflecting the gradual transmission of wage costs caused by the tight labor market to consumers.
Food prices are fragmenting. Excluding fresh food, the increase in food prices accelerated to 2.9%, but the price of rice fell 20.6% year on year, the biggest drop since a record; a year ago, the rise in rice prices was an important factor driving overall inflation in Japan.
Furthermore, Japan's wholesale inflation accelerated again in October, and producer prices rose higher than expected, increasing market expectations that the Bank of Japan would raise interest rates in December. According to data released on Thursday, the corporate commodity price index rose 7.1% year on year, higher than the median forecast of 6.5% and the previous value of 6.8% in September; it rose 0.7% month-on-month, more than double the 0.3% forecast, and fell 0.2% in September after the revision.
Japan's wholesale inflation accelerated again in October, mainly driven by energy and industrial materials. On a month-on-month basis, petroleum and coal products rose by about 3%, chemicals rose by about 2%, steel rose 2%, and electricity, gas and water rose by about 2.4%. The combination of these four contributed about 0.6 percentage points to the monthly increase.
It is worth noting that agricultural products fell 6.6% month-on-month and one-quarter year-on-year due to continued drag on newly harvested cheap rice. The fall in rice prices has overshadowed broader pressure to raise prices — the month-on-month increase after excluding food was close to 1%, indicating that the transmission of energy and industrial materials is comprehensive. This is a sign that is difficult for the Bank of Japan to ignore.
Although producer prices are an upstream indicator, and the Bank of Japan places more importance on consumer inflation and wages, against the backdrop of weak yen and high oil prices, these costs are likely to continue to be transmitted to households. For the Bank of Japan, the potential for core CPI to continue to be above target and wholesale inflation exceeding expectations provided additional data support for the December interest rate hike.
The Bank of Japan kept its policy interest rate unchanged at 1.25% at the end of last month. Meanwhile, the Bank of Japan announced that Japan's inflation rate was “generally in line with the 2% target.” This is the first time since the bank set this inflation target in 2013 that it has made this judgment.
As potential inflation has reached a level roughly in line with the 2% target, the Bank of Japan's policy focus is shifting from driving up prices to preventing inflation from deviating from the target. Ueda made it clear that the central bank will not wait for inflation expectations to naturally anchor, but will adjust policies in due course according to economic, price, and financial conditions. In other words, the Bank of Japan is nearing its end in chasing the 2% inflation target, while normalizing monetary policy is entering a new phase.
Bank of Japan Governor Ueda Kazuo pointed out that Japan's inflation expectations are actually not fully anchored near the target. The central bank will continue to observe various indicators, but what is more important is to determine the mechanism behind price changes, especially whether medium- to long-term inflation expectations have stabilized near target levels. He also stressed that after potential inflation reaches 2%, it is not advisable for prices to exceed the target by a large margin, so the central bank must respond appropriately to upward risks.
The hawkish meaning of this statement is that the Bank of Japan no longer needs to wait for inflation to rise more clearly before considering tightening its policy. As long as potential inflation is close to target, financial conditions remain relaxed, and upward risks persist, there are more compelling reasons to adjust interest rates further.
As for the next policy path, Kazuo Ueda did not give a clear schedule for interest rate hikes, but he did not give the market a reason to wait with peace of mind. He said that the pace of future interest rate hikes will largely depend on upcoming data, and the Bank of Japan cannot decide in advance that there will be a period of several months between each rate hike; the central bank will comprehensively evaluate the possibility of achieving the benchmark economy and price prospects, as well as related risks at every policy meeting.
Kazuo Ueda's speech further strengthened the market's expectations that the Bank of Japan will raise interest rates again during the year. Meanwhile, a summary of the minutes of the Bank of Japan's October policy meeting released this week shows that many members believe interest rate hikes are necessary in the near future, suggesting that interest rate hikes in December are quite likely.