Core inflation in Japan’s capital unexpectedly accelerates, BOJ in spotlight

By Leika Kihara and Takahiko Wada

TOKYO (Reuters) -Core consumer inflation in Japan’s capital Tokyo, considered a leading indicator of nationwide trends, unexpectedly accelerated in October, a sign of broadening price pressures that may keep alive expectations of near-term end to ultra-low interest rates.

The data reinforces expectations the Bank of Japan (BOJ) will revise up its inflation forecasts when it produces fresh quarterly projections at next week’s policy meeting.

The Tokyo core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, rose 2.7% in October from a year earlier, government data showed on Friday, exceeding market forecasts for a 2.5% gain.

The increase, which was faster than a 2.5% gain in September, casts doubt on the central bank’s view that inflation will slow in coming months as cost-push pressure dissipate.

The so-called “core core” index that strips away both fresh food and fuel prices – closely watched by the BOJ as a gauge of broader price trends – rose 3.8% in October from a year earlier after a 3.9% increase in September, the data showed.

Services prices rose 2.1% year-on-year in October, faster than a 1.9% gain in September, suggesting that prospects of higher wages could broaden inflationary pressure beyond goods.

Marcel Thieliant, head of Asia-Pacific at Capital Economics, said the jump in inflation was “consistent with our view that inflation will only fall below the BOJ’s 2% target by the end of 2024.”

“With services inflation continuing to accelerate, it will take a long time before inflation falls back below the BOJ’s 2% target.”

The BOJ remains a global dovish outlier, having maintained ultra-loose policy even as major central banks elsewhere raised interest rates aggressively to fight rampant inflation.

While inflation has exceeded its 2% inflation target for more than a year, the BOJ has pledged to keep ultra-low interest rates until the recent cost-driven price rises shift to a more durable increase driven by domestic demand.

Aside from creeping inflation, a recent surge in global interest rates is heightening pressure on the BOJ to tweak its bond yield control next week, with a hike to an existing yield cap set just three months ago being discussed as a possibility, sources have told Reuters.

(Reporting by Takahiko Wada and Leika KiharaEditing by Shri Navaratnam and Sam Holmes)