Japan’s Inflation Picks Up as Takaichi Prepares Price Measures

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(Bloomberg) — Japan’s inflation ticked higher in October, keeping the Bank of Japan on track for an interest rate hike in coming months as Prime Minister Sanae Takaichi prepares an economic package that aims to soothe public discontent over rising costs of living.

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Consumer prices excluding fresh food rose 3% from a year earlier, according to the Ministry of Internal Affairs and Communications Friday, with rising costs for hotels, car insurance premiums and household durable goods exerting upward pressure on the gauge. That matched the median economist forecast. Prices climbed 2.9% in the previous month.

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Consumer prices have advanced at or above the BOJ’s 2% target for 43 months, the longest such stretch since 1992. A closer indicator for price trends that also strips out energy accelerated to 3.1% from 3%.

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Takaichi is set to unveil her first economic package later Friday after she vowed to address consumers’ simmering frustration over persistent increases in living costs when she took office last month. She’s expected to unveil the largest spending plan since the pandemic era, in a move that adds to her reputation for expansive fiscal policy while putting bond vigilantes on notice.

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The data will support broad market speculation that the BOJ will raise borrowing costs either in December or January. The yen’s renewed weakness, which threatens to further spur inflationary pressure, adds to the case for a rate hike. The yen weakened beyond 157 against the dollar this week, hitting the lowest in 10 months.

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What Bloomberg Economics Says…

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“Japan’s hotter inflation in October points to an earlier Bank of Japan rate hike — unless politics get in the way. Firms are lifting prices on household goods and leisure-related services in the second half of the fiscal year.”

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— Taro Kimura, economist

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October marks the start of the second half of Japan’s fiscal year, making it a good barometer of business behavior, as companies tend to make any price revisions at the mid-point or the beginning of the year.  

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An 8.5% year-on-year gain in accommodation fees and a 6.9% rise in car insurance premiums nudged the gauge higher. Gains in processed food prices and energy costs both slowed, weighing on overall prices. Subsidies for electricity and natural gas shaved 0.26 percentage point off overall inflation.

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The price of rice, a primary force for this year’s inflation, rose 40.2%, decelerating again after peaking at a record pace of 101.7% in May. Service prices, a component the BOJ closely monitors to gauge the sustainability of price increases, rose 1.6% versus 1.4% previously. 

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The BOJ expects inflation to slow below 2% early next year partly due to food prices, which spiked this year, raising the base for year-on-year comparisons. Japan’s major food businesses plan to increase prices on 143 goods this month, 58% fewer items compared with last year, according to Teikoku Databank.