Japan’s Inflation Eases Slightly, but Rate Hike Expectations Remain Firm

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Japan’s CPI has nearly fallen back to the Bank of Japan’s 2% target in October, according to data released by the Ministry of Internal Affairs and Communications on November 22.

The Japan CPI rose by 2.3% year-on-year in October, down 0.2 percentage points from the previous month. This decrease was primarily driven by a significant slowdown in the growth of electricity and gas prices, which further reduced the annual growth rate of energy prices to 2.3% (previously 6.0%).

Excluding fresh food, the core CPI rose by 2.3% year-on-year, a slight decline of 0.1 percentage points from the previous month. Meanwhile, the core-core CPI, which excludes both fresh food and energy, increased by 2.3%, up 0.2 percentage points from the prior month. This marks the third consecutive monthly increase since it fell below 2% in July.

Despite maintaining the Japan benchmark interest rate at its late October meeting, Bank of Japan Governor Kazuo Ueda signaled that the central bank would no longer require extended observation of market dynamics. He stated that if economic and inflation trends meet expectations, the BOJ is prepared to respond with rate hikes. Currently, core inflation remains above the BOJ’s 2% target.

Furthermore, the recent robust economic data from the United States and the conclusion of its presidential election have driven U.S. Treasury yields higher and weakened yen. These factors are expected to place renewed upward pressure on imported inflation, which had shown signs of easing over the past few months.

Although Governor Ueda did not specify the timing of the next rate hike at the recent meeting, market expectations suggest it could occur during the BOJ’s December meeting or in January next year.