Japan core inflation exceeds BOJ target, cements near-term rate hike chance

Japan is preparing for another interest rate hike as inflation surged in September, surpassing the central bank's target level, according to official data released on Friday. The acceleration in inflation was mainly due to rising prices for processed foods, driven by soaring energy costs stemming from the conflict in the Middle East.

Excluding volatile fresh produce, inflation stood at 2.1 percent, up from 1.7 percent in August, exceeding both market expectations and the 2.0 percent target set by the Bank of Japan. With underlying inflation surpassing the BoJ's 2 percent target, the likelihood of further tightening measures appears strong. Experts predict the central bank may revise its inflation forecasts upwards at its October meeting, potentially leading to another rate increase in December.

The Bank of Japan has already raised interest rates in mid-September, following a similar move by other major central banks worldwide to combat strong inflationary pressures. Factors contributing to inflation include a weak yen and higher prices for imported goods, as well as increased costs for rents and automobiles. Government support for fuel and electricity fees has helped cushion the impact on energy prices.

To mitigate the effects of inflation on household purchasing power, the government has introduced a substantial stimulus package and extensive tax breaks on energy. However, these measures may result in significant tax revenue losses, estimated at 10 trillion yen, or around US$63 billion, over two years.