Japan's core inflation rate surged to 2.1% in September, marking the highest level this year and exceeding analysts' expectations. The rise was driven by higher import costs due to a weak yen and lingering effects of elevated energy prices. Core inflation, which excludes fresh food prices, accelerated from 1.7% in August, while headline inflation also hit 2.1%. The Bank of Japan's preferred gauge, 'core-core' inflation (excluding fresh food and energy), reached 2.4%.
Despite a 20.6% year-on-year decline in rice prices, overall goods inflation increased to 2.8% from August's 2.6%. Abhijit Surya, senior APAC economist at Capital Economics, noted that the indirect effects of the energy shock continued to impact prices, with inflation in 'other industrial products' rising to a 13-month high of 3.9%. Consumer energy prices fell 0.6% in September, largely due to subsidies from the Takaichi administration.
Japan's benchmark Nikkei 225 dropped 1.62% on Friday, while the yen strengthened to 156.15 against the dollar. The higher inflation data could push the Bank of Japan to raise interest rates again this year, following a 25 basis points increase in September. The central bank's benchmark rate now stands at a three-decade high of 1.25%. Surya forecasted another rate hike in December, citing underlying inflation above the Bank of Japan's 2% target.
Inflation was primarily driven by price increases in durable goods and public utilities charges, with services inflation also rising slightly from 1.2% to 1.5%. Finance Minister Satsuki Katayama told parliament that Japan was approaching a period of sustained inflation driven by rising wages, though higher import costs also played a role. Oil import costs have increased as Japan shifts to more expensive U.S. energy sources amid the Iranian conflict, further exacerbated by the weak yen.