Tokyo Inflation Hits BOJ’s 2% Target, Signaling Steady Economic Progress

Core inflation in Tokyo hit the Bank of Japan’s (BOJ) 2% target in September, marking a significant step in Japan’s journey towards meeting the criteria for potential future rate hikes. The Tokyo core consumer price index (CPI), which excludes volatile fresh food, rose 2.0% compared to the same period last year, aligning with the BOJ’s inflation goal and the median market forecast. This figure slowed from the 2.4% increase seen in August, primarily due to the resumption of government subsidies aimed at reducing utility bills. Tokyo’s CPI data serves as a leading indicator of national inflation trends and plays a critical role in shaping the BOJ’s monetary policy. Additionally, a separate index that strips out both fresh food and fuel costs, which is closely monitored by the BOJ for broader price trends, increased by 1.6% in September—matching the pace of August.

Service prices, which reflect the costs that companies pass on from rising wages, rose 1.2% in September, slightly down from the 1.3% increase in August. This suggests companies are feeling pressure from wage hikes, though it remains uncertain if these increases will become more widespread in the coming months. The focus is now on whether service prices will accelerate in October, when many Japanese companies typically make their biannual price revisions for goods and services. According to Yoshiki Shinke, a senior executive economist at the Dai-ichi Life Research Institute, rising wages might lead to further hikes in service prices, but uncertainties such as weak exports and the recent rebound of the yen could limit wage increases and affect manufacturers’ profits.

The BOJ ended its negative interest rate policy in March and raised its short-term policy rate to 0.25% in July, based on the belief that Japan was steadily progressing towards achieving a sustained 2% inflation target. BOJ Governor Kazuo Ueda has stated that the central bank is prepared to continue raising rates if inflation stays on track to meet the 2% target. However, Ueda emphasized the importance of gauging how global economic uncertainties could impact Japan’s fragile recovery. Japan’s economy expanded by an annualized 2.9% in the second quarter of 2024, supported by steady wage increases that have helped boost consumer spending. Capital expenditure has also continued to grow, although weaker demand from China and slowing growth in the United States are casting shadows over the outlook for Japan’s export-dependent economy. These global factors could influence the BOJ’s decision on whether to implement further interest rate hikes, with analysts speculating that another hike could come as early as December or early next year.