Global Market: Japan’s core inflation accelerates, putting BOJ rate hikes in focus

Rising price pressures keep the prospect of further BOJ rate hikes in focus.

The core consumer price index (CPI), which excludes volatile fresh food prices but includes fuel costs, increased 2.1% year-on-year in September, matching the median market forecast and accelerating from a 1.7% rise in August, government data showed on Friday.

A separate index that excludes fresh food and fuel prices, which the BOJ closely watches as an indicator of underlying demand-driven inflation, rose 2.4% from a year earlier, up from 1.9% in August.

The latest figures highlighted how higher energy costs linked to the prolonged conflict in the Middle East, elevated import prices stemming from the yen’s weakness and strong demand for AI-related products were offsetting the impact of government fuel subsidies, Reuters reported.

The data could strengthen the case for further rate hikes as the central bank seeks to keep underlying inflation above its 2% target.

However, having raised interest rates last month, the BOJ is expected to keep monetary policy unchanged at its meeting next week. The central bank could nevertheless revise its inflation forecasts upward and signal its readiness to continue raising borrowing costs, sources told Reuters.

The BOJ raised its key interest rate to 1.25% last month, its highest level in 31 years, signalling a greater focus on the risk of underlying inflation overshooting its target and leaving the door open to further increases.

Governor Kazuo Ueda has warned that underlying inflation could exceed the central bank’s 2% target as price pressures stemming from the Middle East conflict, the weak yen and brisk AI-related demand intensify.

The latest inflation figures are likely to reinforce the BOJ’s assessment that price pressures are becoming broader, even as government subsidies help cushion households against rising fuel costs.