Japan's September inflation figures comprehensively exceeded the Bank of Japan's policy target, with deeper price pressures accelerating their spread and market expectations for a rate hike within the year further intensifying.
On October 23, data released by Japan's Ministry of Internal Affairs and Communications showed that Japan's September core CPI rose 2.1% year-on-year, breaking through the Bank of Japan's 2% target for the first time in nine months. The figure matched the median economist estimate and accelerated notably from 1.7% in August.
The deeper inflation gauge excluding fresh food and energy, which the Bank of Japan monitors more closely, rose 2.4% year-on-year, significantly above the 1.9% recorded in August, indicating that demand-driven price pressures are continuing to build.
According to a Bloomberg survey, more than 80% of economists expect the Bank of Japan to raise rates in December, with none anticipating action at next week's meeting. According to Reuters, citing people familiar with the matter, the Bank of Japan is expected to keep policy unchanged next week but may upwardly revise its inflation forecasts and hint at readiness to continue pushing up still-low borrowing costs. According to Bloomberg, citing people familiar with the matter, the Bank of Japan may signal for the first time at its October 30 policy meeting that it believes underlying inflation has reached the 2% target set in 2013.
Underlying Inflation Accelerates, Services Prices Hit Seven-Month High
The core highlight of this data release lies in the broadening and deepening of inflation. The core gauge excluding fresh food and energy jumped from 1.9% in August to 2.4%. As a key measure of demand-driven price pressures, its accelerating upward trend indicates that inflation is not being driven solely by external shocks such as energy or food.
Services prices rose 1.5% year-on-year, the fastest pace since March this year and a marked acceleration from 1.2% in August. The pickup in services inflation is viewed as an important signal of inflation persistence, typically reflecting a greater willingness among businesses to pass on higher labor costs to consumers against the backdrop of a tight labor market.
On the goods side, food prices excluding fresh food accelerated to a 2.9% increase. Notably, rice prices fell 20.6% year-on-year, the largest decline since records began in 1971 — just a year earlier, rice had been one of the main drivers of overall inflation. Hotels, water charges and food prices were the main contributors to the CPI increase this round, while fuel tax reduction measures continued to provide some buffer against energy costs.
Corporate Willingness to Raise Prices Grows, Inflation Broadening Becomes Evident
Inflationary pressures are accelerating their transmission from the input side to the consumption side. According to data from Teikoku Databank, major Japanese food and beverage companies plan to raise prices on 3,153 product items in October, exceeding 3,000 for the second consecutive month — the first back-to-back breach of that threshold since July 2023.
Japan Railways (JR) announced increases to reserved seat fares on the Shinkansen "Nozomi" and "Mizuho" services, while Fast Retailing, the parent company of Uniqlo, also announced price hikes this month, becoming representative cases of the corporate price-raising trend.
Yoshiki Shinke, Senior Chief Economist at Dai-ichi Life Research Institute, said:
"The data shows a strong upward price pressure trend. For the Bank of Japan, this will reinforce its judgment that inflation remains strong and that the risk of overshooting cannot be ruled out. I expect the next rate hike will be in December."
Taro Kimura, Bloomberg economist, also noted:
"Japan's September inflation data came in hot, supporting the Bank of Japan in raising rates further from accommodative levels. The data is consistent with the Bank of Japan's assessment that underlying inflation is approaching the 2% target."
Rate Hike Path Tightens at the Margin, Terminal Rate Expectations Shift Higher
External factors driving this round of inflation also warrant attention. The protracted Middle East conflict is pushing up fuel costs, a weak yen is raising import prices, and price pressures from strong artificial intelligence demand are eroding the effectiveness of the government's fuel subsidy policy.
Bank of Japan Governor Kazuo Ueda has previously warned that the combination of these multiple factors could cause underlying inflation to exceed the 2% target. The Bank of Japan raised its benchmark rate to 1.25% last month, the highest level in 31 years, and signaled a policy stance aimed at guarding against inflation overshooting.
According to Reuters, Masato Koike, Senior Economist at Sompo Institute Plus, said: "Core inflation is expected to accelerate further due to the Middle East conflict pushing up energy costs and their secondary effects. However, since price increases have not expanded sharply, the need for a consecutive rate hike in October is low." He expects the Bank of Japan's next rate hike to materialize in December.
Market expectations for the Bank of Japan's policy path are converging. According to a Bloomberg survey, more than 80% of economists expect a December rate hike, with none anticipating an increase at next week's meeting, making December the baseline scenario.
According to Reuters, most analysts expect the Bank of Japan to raise its policy rate to 1.50% in December and forecast a terminal rate in the 1.75% to 2% range.
Marcel Thieliant, Head of Asia-Pacific at Capital Economics, said the Bank of Japan will keep policy unchanged next week but will continue to send warning signals about upside inflation risks.
"The tightening so far has shown little sign of slowing economic growth, which means the risk that the peak policy rate exceeds our previous forecast of 2% is rising."
On the inflation outlook, Bloomberg noted that based on the Bank of Japan's latest upward revision of this fiscal year's inflation forecast to 2.5%, combined with already-released actual data, the Bank of Japan may expect average inflation through next March to exceed 3%.
At the policy level, the cabinet of Prime Minister Sanae Takaichi approved a bill earlier this month to temporarily cut the food sales tax for two years starting next April, in order to ease the cost-of-living burden on households.
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