Japan's core inflation exceeded 2%, as the Nikkei 225 fell and the yen weakened.

On Friday (October 25),Comparison of difficulty of futures and foreign exchange transactions Japan released its October Consumer Price Index (CPI), showing that the core inflation rate in the Tokyo area, excluding fresh food, rose 1.8% year-on-year, below the key level of 2%. This is the first time in five months that Tokyo's core inflation rate has fallen below 2%, mainly due to a slowdown in energy price increases. As a result, the Nikkei 225 Index fell by 0.74% on the day, wiping out all of the month's gains. Meanwhile, the yen continued to weaken against the dollar, with the dollar/yen exchange rate rising 0.14%, breaking the 152 mark, and up nearly 6% for the month, marking the largest monthly increase since April 2022.

The drop in inflation reflects not only the volatility in global energy prices but is also closely related to the Japanese government's subsidy policy for energy prices. Data shows that the subsidy policy reduced the overall inflation rate by 0.51 percentage points in October. Although the Bank of Japan has long maintained ultra-loose monetary policy, BOJ Governor Kazuo Ueda stated that achieving the 2% price stability target will still take time, and the central bank will continue to maintain its accommodative policy in the short term. Meanwhile, BOJ Policy Board Member Seiji Adachi also noted that if inflation remains stable around 2%, the BOJ may gradually adjust monetary policy to bring the policy rate closer to the neutral rate.

At the macroeconomic level, the decline in Tokyo's inflation data indicates that the Japanese economy is undergoing a process where cost-driven price pressures are gradually easing, especially in the energy sector. However, the easing of global inflationary pressures has not alleviated market concerns about the direction of Japan's monetary policy. As the BOJ continues to maintain a low-interest environment, the persistent weakness of the yen increases import costs, further affecting the pace of economic recovery.

The policy direction of the Bank of Japan will continue to be the focus of market attention. Expectations for the central bank to maintain its accommodative policy at next week's meeting have gradually intensified, and investors are also closely observing how changes in the global economic environment may affect Japan's inflation trajectory and the timetable for policy adjustments.

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