Japan’s Core Inflation Accelerates in October, Fueling Rate Hike Expectations

Japan’s core inflation in Tokyo quickened in October, surpassing the Bank of Japan’s (BOJ) 2% target and maintaining market expectations for a potential interest rate hike early next year. Government data showed the Tokyo core consumer price index (CPI)—which excludes volatile fresh food—rose 2.8% year-on-year, above the forecasted 2.6% increase and up from 2.5% in September.

However, the uptick was largely driven by persistent food inflation, while service-sector price growth remained modest. Food prices, excluding fresh produce, rose 6.7% in October, slightly down from 6.9% in September. The rise included a sharp 38.4% surge in rice prices and the end of subsidies on water fees. In contrast, services inflation held steady at 1.6%, while goods prices surged 4.1%, highlighting weak wage-driven price pressures.

A separate measure of inflation, which strips out both fresh food and fuel costs—closely monitored by the BOJ—also rose 2.8%, signaling sustained price momentum in the capital.

The data followed the BOJ’s decision on Thursday to keep short-term rates steady at 0.5%, with two board members dissenting amid concern over deepening inflationary pressures. Analysts expect the BOJ to raise rates in January, though further hikes could prove difficult without stronger domestic demand.

Masato Koike, senior economist at Sompo Institute Plus, noted that inflation could slow as food price effects fade. Still, the BOJ remains cautious, seeking inflation driven by wage and demand growth rather than import or raw material costs.

Adding to optimism, Japan’s factory output rose 2.2% in September—above market expectations—while the jobless rate stayed unchanged at 2.6%, suggesting resilience in the economy despite ongoing global headwinds.