Japan Core CPI Rises 2.4% YoY in Sept, First Slowdown in 5 Months, Will Dec Rate Hike Happen?

Driven by the resumption of energy subsidies, Japan's core inflation slowed in September, and it remains uncertain whether the Bank of Japan can continue to raise interest rates in December.

On the morning of Friday, October 18th, the Japanese government released data showing that Japan's core CPI (excluding fresh food) rose by 2.4% year-on-year in September, marking the first slowdown in five months, higher than the expected 2.3%, and lower than the previous value of 2.8%; the "core of the core" CPI (excluding fresh food and energy) rose by 2.1% year-on-year, higher than the expected and previous value of 2%.

The "core of the core" inflation remains stable, therefore, some analysts believe that Japan's solid wage growth will support consumption and keep inflation around 2%, which allows the Bank of Japan to continue raising interest rates at the end of the year.

Marcel Thieliant, Head of Asia-Pacific at Capital Economics, said:

"We expect inflation excluding fresh food and energy to remain near 2% at the beginning of next year, and then gradually fall below 2%, so we still expect the Bank of Japan to continue raising interest rates before the end of the year."

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Bank of Japan Governor Haruhiko Kuroda also previously stated that if inflation stabilizes back on the track to 2%, the bank will continue to raise interest rates. However, he emphasized that the bank needs time to assess the impact of global economic uncertainties on Japan's fragile economic recovery.

Kuroda said that the drivers of inflation must shift from rising raw material prices to solid domestic demand and wage growth in order to sustainably achieve 2% inflation. Data shows that Japan's service inflation in September slowed from 1.4% in August to 1.3%, indicating that companies are passing on rising labor costs at a slow pace.

However, many analysts also believe that the Bank of Japan will not raise interest rates again in December. Most economists surveyed by Reuters believe that the Bank of Japan will not raise interest rates for the rest of the year, and it is expected to raise interest rates again in March next year.

A Reuters survey shows that an important indicator of Japan's inflation, the "Tokyo core CPI," is expected to rise by 1.7% year-on-year in October, the first time in five months below the Bank of Japan's 2% target. At the same time, service inflation is also relatively weak, and many analysts believe that solid wage growth will support consumption and keep inflation around 2%.

Junichi Makino, Chief Economist at SMBC Nikko Securities, said:"The global decline in commodity prices and the appreciation of the Japanese yen may lead to lower food prices in the future, while service inflation is expected to continue to stagnate."