Japan core inflation in September surges to its highest this year at 2.1%

Japan’s core inflation in September hit its highest this year at 2.1%, overshooting analysts’ expectations, pressured by steeper import costs due to a weak yen and the indirect impact of higher energy costs.

Core inflation, which strips out prices of fresh food, was in line with estimates by economists polled by Reuters, and accelerated from the 1.7% in the prior month.

Headline inflation came in at 2.1%, while the so-called “core-core” inflation, which excludes prices of fresh food and energy and is the Bank of Japan’s preferred gauge, was at 2.4%.

“That acceleration was noteworthy, not least because it occurred despite a sharp slowdown in fresh food inflation and continued energy deflation,” said Abhijit Surya, senior APAC economist at Capital Economics.

Rice prices notably declined 20.6% year on year, however, Surya said that this sharp drop could not prevent overall goods inflation from picking up to 2.8%, up from August’s 2.6%.

“One reason may be that the indirect effects of the energy shock are continuing to feed through, with inflation in ‘other industrial products’ rising to a 13-month high of 3.9%,” Surya added.

Consumer energy prices, which fell 0.6% in September, have mostly declined so far this year, despite the Iran war, due to subsidies handed out by the Takaichi administration.

Japan’s benchmark Nikkei 225 declined 1.62% on Friday, while the yen strengthened to 156.15 against the dollar.

Higher inflation could push the Bank of Japan for another rate hike this year, after a 25 basis points increase in September, as the central bank normalizes its monetary approach after decades of reflationary policy. Japan raised rates to a three-decade high of 1.25% in September.

With underlying inflation back above the Bank of Japan’s 2% target, the case for further tightening remains on solid ground, Surya said, forecasting that another hike will happen in December.

Inflation appears to be driven by price increases in the prices of durable goods and public utilities charges, government data showed. Services inflation also increased slightly from 1.2% to 1.5%.

Finance Minister Satsuki Katayama reportedly told parliament on Wednesday that Japan was “on the cusp of shifting to a period of sustained inflation driven by rising wages,” while acknowledging that higher import costs were also contributing to price growth.

Oil import costs have risen as Japan buys energy from more expensive U.S. sources and switches away from Middle Eastern suppliers oil due to the Iranian conflict. Weakness in yen is also making oil cost more for Japan.

When Katayama was asked by a lawmaker whether the government’s tax cut plan could conflict with the central bank’s efforts to combat inflation with interest rate hikes, he said, “I see no gap between the view of the government and that of the BOJ,” Reuters reported.

On Tuesday, Japan’s Lower House began debating a bill to cut the consumption tax on food to 1% from 8% for two years, public broadcaster NHK reported. It also includes provisions for support payments to workers based on income levels.