Japan's Inflation Accelerates, Keeping Rate Hike Prospects Alive

Japan's core inflation accelerated in November, rising to 2.7% year-on-year, according to government data released Friday, reports Reuters. This increase, slightly exceeding analysts' forecasts, keeps pressure on the Bank of Japan (BOJ) to consider further interest rate hikes.

The BOJ, which opted to keep rates steady at 0.25% on Thursday, is now facing mounting evidence of broadening inflationary pressures. The November core CPI reading, which includes oil products but excludes fresh food prices, was driven partly by persistent rises in rice prices and the phasing out of government subsidies aimed at curbing utility bills.

"November's surge in inflation wasn't a surprise," Capital Economics wrote in a research note. "The Bank of Japan will have known it was on the cards when it decided not to hike rates yesterday. But it should add to the Bank's confidence that it can resume rate hikes over the months ahead."

A separate index, closely monitored by the BOJ as a gauge of demand-driven inflation, rose 2.4% in November, further supporting the view that price pressures are broadening beyond imported costs.

The BOJ's decision to stand pat and Governor Kazuo Ueda's dovish comments following the rate announcement, however, drove the dollar to a five-month high against the yen, potentially adding to inflationary pressures by pushing up import costs.

Despite this, Governor Ueda stated on Thursday that the BOJ required further clarity on wage growth and incoming US President Donald Trump's economic policies before considering another rate hike.

"Given the (BOJ's) assessment that import price rises are subsiding, it's hard to expect the BOJ to hike rates in January," said Naoya Hasegawa, chief bond strategist at Okasan Securities, to Reuters. "Most market players likely viewed Ueda's news conference as quite dovish," Hasegawa added, predicting a potential rate hike in March.