Japan's core CPI rose 2.1% year-on-year in September, surpassing the central bank's 2% target for the first time in nine months! Broadening inflation strengthens expectations of a near-term rate hike.

According to Golden Ten Data APP, data released on Friday showed that Japan’s core Consumer Price Index (CPI) rose by 2.1% year-on-year in September, exceeding the Bank of Japan's 2% inflation target for the first time in nine months. This indicates that price pressures are spreading and further solidifies market expectations for a rate hike in the near term. The figure was in line with the market median estimate, following a 1.7% year-on-year increase in August.

This core CPI excludes volatile fresh food prices but includes fuel costs. The index that is more closely watched by the Bank of Japan—which excludes both fresh foods and fuel costs—rose by 2.4% year-on-year in September, up from 1.9% in August, and is regarded as a better indicator of demand-driven price pressures.

The data suggests that the prolonged Middle East conflict driving up fuel costs, a weak yen pushing up import prices, and the robust demand for artificial intelligence (AI) are intensifying price pressures and undermining the impact of government fuel subsidies.

Last month, the Bank of Japan raised its key interest rate to a 31-year high of 1.25%, signaling a shift towards guarding against potential inflation overshoots and increasing the likelihood of further rate hikes. According to Reuters, citing sources, the Bank of Japan is expected to keep policy unchanged next week but may raise its inflation forecast and hint at a readiness to continue raising borrowing costs, which remain low.

Bank of Japan Governor Kazuo Ueda has warned that underlying inflation—broad-based price trends excluding temporary and one-off factors—could exceed the 2% target due to price pressures stemming from the Middle East conflict, a weak yen, and strong AI demand.