Japan's inflation exceeds target, with a rate hike expected by December or January.

Japan's inflation rate continues to exceed the central bank's target, sparking market expectations for further tightening of monetary policy. On Friday, November 22nd, data released by Japan's Ministry of Internal Affairs showed that the core Consumer Price Index (CPI), excluding fresh food, rose by 2.3% year-on-year in October. Although this was lower than September's 2.4%, it still surpassed the market's forecast of 2.2%. Another index, which better reflects underlying inflation by excluding prices for energy and fresh food, also rose by 2.3% year-on-year, up from September's 2.1%.

Inflation Slows as Fiscal Policy Impact Surfaces

The data indicates that the slowdown in Japan's inflation is mainly influenced by government fiscal policies, including utility subsidies. In October, electricity prices saw their year-on-year increase drop significantly from 15.2% in September to 4%, and gas price increases also moderated. Overall, these subsidies reduced the CPI growth rate by 0.54 percentage points.

However, core price growth remains solid, with processed food prices rising 3.8% year-on-year, higher than September's 3.1%. In addition, a report by Japan's Teikoku Databank showed that food companies raised prices on 2,911 types of foods in October, including a 60% surge in rice prices. Service prices also accelerated from a 1.3% year-on-year increase in September to 1.5%, further indicating that inflation is gradually embedding itself into the economy.

Economists Anticipate Rate Hike Timing

Despite the slight easing of inflation, the Bank of Japan remains optimistic about the firmness of underlying inflation. Takeshi Minami, an economist at the Norinchukin Research Institute, noted, "Excluding the effects of electricity and gas, inflation is still robust, largely driven by rising import prices. Although overall consumer performance is moderate, prices continue to show a strong growth trend. I believe the Bank of Japan might raise rates again in December."

Market Awaits Policy Decision

The market generally believes that the Bank of Japan is gradually moving toward normalizing monetary policy. This year, the Bank of Japan has adjusted its policy stance twice in an attempt to cope with ongoing inflationary pressures. Although Governor Kazuo Ueda has not yet specified a timing for rate hikes, many economists expect a decision during the Bank's policy meeting on December 19th, or at the latest, a rate hike by January 2024.

This would mark a further step for the Bank of Japan away from its long-term policy of easing, potentially having broad impacts on international financial markets, particularly the yen exchange rate and global bond markets.

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