Japan CPI Preview: Forecasts from four major banks, inflation likely picked up

We expect headline CPI inflation to have picked up to 3.4% YoY from 3.0% in the previous month. Core CPI inflation also likely rose to 2.9% from 2.8%, reversing from a downward trend in the prior three months. We expect core CPI inflation excluding fresh food to have stayed below 3%, but core-core excluding fresh food and energy to have stayed above 4%, indicating that Japan’s inflation remains sticky. A reduction in utility subsidies likely pushed up inflation. Also, strong tourism may have affected CPI. October Tokyo CPI rose more than market expectations – headline CPI inflation rose to 3.3% from 2.8%; national CPI will likely follow this trend.

ING

We expect headline inflation to reaccelerate to 3.3% YoY in October (vs 3.0% in September). Prices of fresh food and energy will be the main drivers, but prices of other services are also expected to rise, reflecting the accumulated input price upward pressure. Core inflation (excluding fresh food and energy) will likely stay above the 4.0% level, which is likely to shift the BoJ’s policy stance more towards the neutral from the ultra-easing bias.

We expect nationwide core CPI (excluding only fresh food) to increase 3.0% YoY in October, picking up from a 2.8% YoY rise in September. Meanwhile, CPI excluding fresh food and energy likely increased 4.1% YoY in October, down from a 4.2% YoY advance in September and core CPI inflation excluding special factors (i.e., energy, mobile phone charges and hotel charges) likely increased 3.58% YoY in October, slowing from a 3.94% YoY climb in September. As October Tokyo CPI data confirmed, YoY inflation probably moderated, especially for goods, as businesses raised prices rapidly a year ago. We expect overall CPI to accelerate from +3.0% YoY in September to +3.5% YoY in October, driven by the halving of subsidies for electricity and gas charges as well as spikes in fresh vegetable prices.

While Japanese inflation has slowed in recent months, the consensus forecast is for that trend to be interrupted with the October CPI. Headline inflation is expected to quicken to 3.4% YoY (from 3.0% in September), while the CPI excluding fresh food is also seen quickening modestly to 3.0% in October (from 2.8% in September). On the one hand, the continued persistence of inflation above BoJ’s 2% inflation target should be supportive of the view of an eventual policy rate increase during the first half of next year. However, to the extent that ongoing inflation restrains consumer purchasing power, that would provide a partially offsetting argument. Overall however, we expect persistent elevated inflation, accompanied by firmer wage growth and steady economic growth, will see the BoJ raise its policy rate 10 bps to 0.00% at its April monetary policy meeting next year.