Japan's Core Inflation Slows in October, but Stays Above BOJ Target

Japan's core inflation rate, which excludes fresh food but includes fuel costs, slowed to 2.3% year-on-year in October 2024, its lowest level since January. This reading, while down from the 2.5% seen in September, remains above the Bank of Japan's (BOJ) 2% target. The slowdown can be attributed to a decrease in energy prices, which had been a significant driver of inflation. Energy prices increased by 8.5% year-on-year in October, down from 11.9% in September (Trading Economics). However, food prices continued to rise, with a 3.4% increase in October, slightly lower than the 3.6% increase in September.



The BOJ's monetary policy decisions and communication have played a significant role in shaping core inflation. The central bank has been grappling with a hawkish shift due to persistent core inflation above its 2% target. The BOJ raised interest rates in March and July, signaling a commitment to achieving its inflation target. Governor Kazuo Ueda's warning against keeping borrowing costs too low further underscores the BOJ's hawkish stance. Despite the recent slowdown in core inflation, the rate remains well above the BOJ's target, supporting the central bank's hawkish stance.

Wage growth and labor market dynamics have also contributed to the slowdown in core inflation. Despite the BOJ's hawkish shift this year, wage growth has not kept pace with inflation. The BOJ's latest summary of opinions suggests that if prices and the economy develop as expected, the policy rate could reach 1% by the second half of its 2025 fiscal year at the earliest. However, the central bank is widely expected to hold policy steady in September before resuming rate hikes either in October or December.

External factors, such as geopolitical tensions and global supply chain disruptions, have also impacted core inflation in Japan. Geopolitical tensions, particularly those surrounding semiconductor supply chains, have disrupted production and increased costs for Japanese companies. Additionally, global supply chain disruptions, exacerbated by the COVID-19 pandemic and geopolitical instability, have contributed to price increases in various sectors. Despite these challenges, the BOJ is expected to maintain its hawkish stance, with a majority of economists polled by Reuters anticipating a 25 basis point rate hike in December.

In conclusion, Japan's core inflation rate slowed in October but remained above the BOJ's 2% target. This slowdown can be attributed to a decrease in energy prices, the BOJ's monetary policy decisions, wage growth, and external factors. The BOJ is expected to maintain its hawkish stance, with a majority of economists anticipating a rate hike in December. Investors should closely monitor the BOJ's policy decisions and the evolution of core inflation in Japan to make informed investment decisions.