The Bank of Japan's core inflation gauge, which measures underlying price trends, jumped to 3.2% in September, a three-year high that significantly exceeds the 2% policy target. The data reinforces the case for the BOJ to continue its rate hike cycle and shifts market attention further toward the December meeting.
According to Bloomberg, data released by the BOJ on Tuesday showed consumer prices excluding fresh food and special factors rose 3.2% year-on-year, accelerating notably from 2.6% in August. This indicator is designed to more accurately reflect underlying inflation trends.
The market widely expects the BOJ to keep rates unchanged at Friday's policy meeting, but expectations for a December rate hike are building. A Bloomberg survey shows that more than 80% of economists expect the BOJ to raise its benchmark rate in December, with none of the respondents anticipating action this week.
For investors, the reacceleration of the inflation gauge means the pace of Japan's monetary policy normalization could still quicken. If the BOJ confirms that underlying inflation has sustainably reached its 2% target, rate hike expectations will continue to influence the pricing of the yen, government bond yields, and rate-sensitive assets.
Underlying inflation climbs to a three-year high
The BOJ's price trend indicator shows that consumer prices excluding fresh food and special factors rose 3.2% year-on-year in September, the highest level in three years.
This increase is not only above the BOJ's 2% inflation target but also accelerated by 0.6 percentage points from the previous month, indicating that price pressures have not subsided despite the implementation of some government subsidies. Compared with the inflation measures typically watched closely by the market, this data excludes short-term policy distortions such as subsidies and better reflects underlying price trends.
Data released by the Japanese government last week showed that consumer prices excluding fresh food rose 2.1% year-on-year in September. The gap between the two indicators reflects the downward pressure that energy and utility subsidies have placed on headline inflation readings.
December emerges as the market's focal point
The BOJ already raised borrowing costs to 1.25% in September, marking the fastest pace of rate hikes since 1990. Following the release of the latest inflation data, market expectations for further policy tightening have been reinforced.
The Bloomberg survey shows that more than 80% of economists expect the BOJ to raise rates at its December meeting. By contrast, none of the surveyed economists anticipate the central bank adjusting its policy rate at Friday's meeting.
This means the focus of this week's meeting may not be on immediate action, but rather on whether the BOJ sends a clearer signal, particularly regarding its assessment of whether underlying inflation has reached the 2% target. That target was established more than 13 years ago.
Ueda signals continued rate hikes
BOJ Governor Kazuo Ueda said this month that underlying inflation is already very close to 2% and that the central bank can no longer tolerate it rising further. This remark is seen as a signal that the BOJ remains inclined to continue raising rates.
With the latest price indicator rising above 3%, Ueda's earlier comments have gained more data support. If the BOJ concludes that inflationary pressure is no longer a temporary phenomenon, the policy focus will lean more toward preventing price increases from becoming further entrenched.
For the market, the key is not just the strength of a single month's data, but whether the BOJ raises its assessment of inflation persistence accordingly and translates that judgment into actual policy action in December.
Accelerating service prices add policy pressure
Recent data released by Japan broadly supports further monetary tightening. Data published earlier on Tuesday showed that Japan's services producer prices rose at a faster pace, partly affected by the conflict in the Middle East.
The strength in service prices, combined with the rebound in the core inflation gauge, indicates that price pressures are not confined to individual goods or subsidized items. For the BOJ, this increases the urgency of continuing to advance interest rate normalization.
If Friday's meeting results in no change as expected, the December meeting will become the key juncture for the next phase of policy judgment. Whether core inflation can remain elevated and whether the BOJ formally confirms that underlying inflation has reached its target will determine whether rate hike expectations can shift from market consensus to policy reality.
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