Japan Core Inflation Climbs to 2.1 Percent in September

Japan's core inflation accelerated to 2.1% in September, its highest level this year, as a weaker yen and the indirect effects of rising energy costs pushed prices higher. Government data released in October showed that inflation excluding fresh food prices exceeded expectations, reinforcing the prospect of another Bank of Japan interest rate increase before the end of 2026.

Core inflation rose from 1.7% in August to 2.1% in September, matching the forecast of economists polled by Reuters. Headline inflation also reached 2.1%, while core-core inflation, which excludes fresh food and energy prices, climbed to 2.4%, according to the government figures.

Abhijit Surya, senior APAC economist at Capital Economics, said the acceleration stood out despite easing fresh food inflation and continued declines in energy prices. He noted that the broader increase indicated persistent price pressures across other categories of goods.

Rice prices fell 20.6% year over year, according to Surya. However, the decline did not prevent overall goods inflation from accelerating to 2.8% in September, compared with 2.6% in August.

Surya attributed part of the increase to the continuing indirect effects of the energy shock, which have affected industrial products beyond energy itself.

Inflation in other industrial products reached 3.9%, its highest level in 13 months, he said. The figures suggest that cost pressures have continued to spread even as some food and energy prices have eased.

The inflation data could strengthen the case for further monetary tightening by the Bank of Japan following its September rate increase of 25 basis points. The central bank raised its policy rate to 1.25%, a three-decade high, as it continued moving away from decades of reflationary monetary policy.

With underlying inflation above the Bank of Japan's 2% target, Surya maintained that the argument for another increase remained strong. He forecast that the central bank would raise rates again in December.

Government data showed that higher prices for durable goods and public utilities contributed to inflation in September. Services inflation also accelerated, rising from 1.2% in August to 1.5%.

Finance Minister Satsuki Katayama told parliament on Wednesday that Japan was approaching a period in which sustained inflation would be driven by rising wages. She also acknowledged that higher import costs were contributing to price increases.

Japan's energy import expenses have increased as the country purchases more expensive supplies from the United States and shifts away from Middle Eastern suppliers amid the conflict involving Iran. The weaker yen has further increased the cost of imported oil.

Katayama also addressed concerns about whether government measures to reduce consumer costs could conflict with the central bank's efforts to control inflation through higher interest rates. Reuters reported that she responded to a lawmaker's question by saying, "I see no gap between the view of the government and that of the BOJ."

Separately, Japan's Lower House began debating a bill on Tuesday that would reduce the consumption tax on food to 1% from 8% for two years, according to public broadcaster NHK. The proposal also includes support payments for workers based on their income levels.