Faster Tokyo Inflation Supports BOJ Rate Hike Case, Lifts Yen

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(Bloomberg) — Inflation in Tokyo rose at a faster pace, supporting the case for the Bank of Japan to keep raising interest rates gradually and giving the yen a boost.

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Consumer prices excluding fresh food gained 2.8% in October from a year earlier in the capital, according to the Ministry of Internal Affairs and Communications on Friday, with the main driver being water charges. The median economist estimate in a Bloomberg survey was for a 2.6% increase after the gauge rose 2.5% in September.

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The pace of price gains has stayed at or above the BOJ’s 2% target for three and a half years, though BOJ Governor Kazuo Ueda maintains that the underlying trend is still some way from reaching that goal. In the latest month, inflation barring fresh food and energy gained 2.8%, picking up from 2.5% in the previous month. Overall inflation also registered 2.8% growth. 

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The yen rose to 153.84 versus the dollar after the data were released, versus around 154.17 shortly before.

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What Bloomberg Economics Says…

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“Tokyo’s surprisingly hot inflation in October points to an earlier rate hike by the Bank of Japan. Firms are lifting prices for household goods and labor-intensive services in the second half of the fiscal year, while the end of the city’s water-charge waiver added to the surge.”

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— Taro Kimura, economist

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Prime Minister Sanae Takaichi aims to soften the blow of rising prices to consumers and companies with fresh economic measures. The new leader has promised to cut the gasoline tax during the current diet session, bring down electricity and gas costs during the winter, and deliver additional grants for regional governments while raising the ceiling on tax-free earnings.

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With city-wide subsidies for water having run their course, costs for water were flat in October versus a year earlier. In September, the subsidies led to a decline of 34.6% for those costs. Prices for energy and processed food nudged lower.

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While the Tokyo CPI report is a leading indicator for national trends, isolated subsidies affecting only the capital can sometimes distort that dynamic. 

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In other data, industrial production rose 2.2% in September from August, beating the consensus estimate of 1.5% growth, while rising 3.4% from a year earlier. Meanwhile retail sales advanced 0.3% in September versus the prior month and rose 0.5% year on year.

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The jobless rate held steady at 2.6% and the job-to-applicant ratio stayed at 1.20 in September, meaning there were 120 jobs offered for every 100 applicants.

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Unlike in the US, where the central bank faces political pressure to change interest rates, in Japan the BOJ hasn’t faced much open pressure on policy. Takaichi, who is known as an advocate of monetary easing, hasn’t made any explicit demands on the BOJ since becoming premier, though she drew attention in September 2024 when she declared it would be “stupid” to lift interest rates.

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The BOJ held its benchmark interest rate unchanged on Thursday. Prior to the decision, BOJ watchers in a Bloomberg survey pushed back their forecast for the next interest rate hike timing. Around half see December as the most likely month when the next hike might come.

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(Updates with economist’s comments and industrial output and retail sales.)

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