Tokyo Inflation & Output Spur BOJ Rate Hike Speculation

Article Summary

• Tokyo inflation remains above the BOJ's 2% target.
• Japanese industrial output surpasses expectations.
• Anticipation of a BOJ interest rate hike in December or January.
• Japanese government implements measures to combat rising living costs.
• Inflation risks stemming from a weaker Yen.

Inflation and Output Bolster Rate Hike Talk

With Tokyo inflation remaining steady and industrial output unexpectedly growing, the Bank of Japan (BOJ) may consider raising interest rates at its December or January meeting. Data released by the Ministry of Internal Affairs and Communications showed that Tokyo's core consumer price index (CPI), excluding fresh food, rose 2.8% year-on-year in November. The accelerating increase in electricity costs offset the slowing growth in processed food prices. This figure slightly exceeded the median economist forecast of 2.7% and was the same as the previous month's increase.

Sticky Core Inflation

The core inflation index, which excludes fresh food and energy, also rose 2.8%, in line with the previous month. Service prices, a crucial component in gauging inflation sustainability, increased by 1.5% year-on-year. Rice prices, a major driver of price increases this year, continued to slow after reaching a record high of 93.8% in April, reaching 37.9%.

Data's Impact on BOJ Policy

The Tokyo inflation data, considered a leading indicator of nationwide price trends, likely strengthens the BOJ's confidence in its economic outlook. The data may further boost trader bets for a December rate hike, speculation that has recently intensified.

"Overall, today's data provides no reason to prevent the BOJ from considering raising interest rates," said Taro Saito, head of economic research at NLI Research Institute. "My base expectation is for a rate hike next January, but this will be decided after considering the yen and political factors."

Taro Kimura, a Bloomberg economist, added, "Tokyo's November CPI data shows that inflation remains sticky, thanks to robust wage growth, strong price expectations, and the elimination of energy subsidies. With Tokyo's data pointing to national inflation approaching 3%... this will boost confidence that price growth will be durable enough to justify further reductions in stimulus as early as December."

Market Reactions and Political Pressure

Following the data release, the yen's exchange rate against the dollar remained relatively stable at around 156.25, while stock markets experienced mixed movements.

High living costs are a top concern for Prime Minister Sanae Takaichi's government. She unveiled her first economic stimulus package last week to address this issue. Despite the slowing growth in processed food prices, they remain elevated at 6.5%. In addition to rice, chocolate and coffee also contributed to price increases.

Increase in Price Hikes

Data released by Japanese research firm Teikoku Databank showed that the number of price increases by major Japanese food companies will reach 20,609 this year, a 64.6% increase from last year.

Industrial Output Growth

In other data released on Friday, Japan's Ministry of Economy, Trade, and Industry reported that industrial output in October grew 1.4% month-on-month, surpassing the consensus expectation of a 0.6% decline, and rose 1.5% year-on-year. Automobile production rebounded as the US-Japan trade agreement reduced automobile tariffs from 27.5% to 15%, while artificial intelligence demand boosted information and communication equipment production.

"The data suggests that manufacturing is recovering from the early hit of US tariffs," Kimura said. "This reinforces the BOJ's assessment at the October meeting that downside risks to growth are receding."

Unemployment and Job Rates

Additionally, the unemployment rate in October remained steady at 2.6%, and the jobs-to-applicants ratio edged down slightly to 1.18, implying that there were 118 jobs available for every 100 job seekers.

Calls for Additional Measures

Tomoko Yoshino, the head of Japan's largest trade union organization, Rengo, urged the Takaichi government to take further measures to combat inflation, as the yen's depreciation may cause inflation to continue to outpace nominal wage growth. Real wages in Japan have consistently declined over the past nine months. Rengo will demand wage growth exceeding 5% in negotiations with employers that will conclude next March.

Government Stimulus Package

Takaichi last Friday unveiled an economic stimulus package with a total of 7.7 trillion yen ($113 billion USD) in new spending, focusing on addressing rising living costs, including expanding utility subsidies and cutting gasoline taxes. Sumitomo Mitsui Nikko Securities estimates that the direct impact of these measures will reduce Japan's core CPI by 0.38 percentage points next year.

Future Outlook

"Due to the government's gasoline and utility measures, Japan's inflation will start to slow down rapidly from now on," Saito said. "I expect that Tokyo's year-on-year inflation growth in the next data will be around 2.5%, but this does not mean that the price trend will also decline."

Japan's nationwide key inflation gauge rose to 3% last month, remaining at or above the BOJ's 2% target for over three and a half years. High living costs were a major reason for setbacks faced by Takaichi's Liberal Democratic Party in recent national elections, losing majorities in both houses of parliament.

Bank of Japan Governor Kazuo Ueda has kept the benchmark interest rate at 0.5% since January of this year, awaiting more evidence that underlying inflation will achieve the 2% target. With the economy having recovered from the once-feared damaging impact of US tariffs, virtually all BOJ watchers expect a rate hike no later than next January.

Former BOJ executive director Momma Kazuo told Bloomberg this week that the possibility of a rate hike at the December monetary policy meeting is "quite high" given the recent decline in the yen. "Food inflation is expected to weaken, but the risk is that the yen will depreciate again," he said. "The yen may be increasing upside risks to inflation."