The core inflation within Tokyo remained stable at 2.5% year-on-year in September, compared to economists’ projections of 2.8%, and at the same pace as it was in August. Core-core inflation without fresh food and energy costs softened sharply to 2.5 percent compared to August’s 3.0 percent and relieved the Bank of Japan of the need to cause sharp increases in interest rates.
Core-core inflation slips that far below what is anticipated on the market
Government figures revealed on Friday that inflation in Tokyo increased by 2.5 percent year-on-year in September, below expectations of 2.8 percent, but rising in line with previous levels in the month of August, according to Mitrade. The core-core, excluding the price of fresh food and energy, went down to 2.5% in September versus 3.0% in August. Although at this point still above the 2% target of the BOJ, the pullback has triggered yen weakness and sharpened interest in the US CPI report later in the day.
The inflation rates of Tokyo are usually regarded as an indicator of the overall patterns in the country. The figures for Friday indicated a deceleration in underlying price increases, which could make further rate increases less easily justifiable by the Bank of Japan. However, the main gauge that remains constant reveals the sensitivity of the data to government actions, making the argument why the BOJ will not use a single release of data to drive the factors that will determine their rates.
Yoshiki Shinke, the senior executive economist at Dai-Ichi Life Research Institute, went as far as to say, With no significant change recorded in Tokyo data today but the special one-off factors, I do not think it will stop the BOJ contemplating a rate rise. This will not drive the BOJ, but it will not make them hold back either, since the factors will be evident.
Sentiment changes to the market as BOJ rate reduction speculation wanes
In the opinion of the FX Empire, Tokyo inflation and Japanese wage data are sinking bets regarding an October increase in the Bank of Japan interest rate that would alleviate risks of a yen unwind carry trade. The core rate of inflation decreased by 3 percent in August to 2.5 percent in September, and 2.5 percent is the reading of the headline inflation. The core inflation was projected to increase by 3.3 percent by economists.
The wage information provided the BoJ with additional justifications to postpone the increase in interest rates. In July, real wages declined by 0.2 per cent., the seventh month in a row of declines. A lower wage rate could reduce consumer expenditure, which would slow down an inflationary demand. The core falls to the BoJ 2% target, and declining real wages may delay a BoJ rate increase to December (possibly not to January), alleviating yen demand. Early trading in the USD/JPY pair was at 149.786, which retained the 0.60% gain that was realized in the last session.
The uncertainty during political decisions complicates monetary policy decisions
Prime Minister Shigeru Ishiba resigned this month following numerous setbacks in elections that cost him party supporters. To a large degree, a lot of displeasure was a result of the current cost-of-living strain. Five candidates have attracted the party of Liberal Democrats’ race to lead the party, and each candidate has promised to deal with household cost pressures. The election of the leadership will be held on Oct. 4.
The core rate of inflation, together with the enduring wage pressure and the housing market dynamics, form an aesthetic backdrop on which decisions on the monetary policy are to be made. With markets still seeking to strike the right chord on what to expect in October rate changes, the central bank is now left with a very delicate task in balancing price stability goals and the larger economic stability goal in an ever-more-uncertain global market environment.