(Bloomberg) -- Inflation in Tokyo slowed below 2% for the first time in five months largely due to energy prices, as the country heads into a general election and the Bank of Japan mulls data for its policy decision next week.
Consumer prices excluding fresh food rose 1.8% in the capital in October, marking the second month of deceleration, the Ministry of Internal Affairs reported Friday. The reading slightly exceeded economists’ estimates of 1.7%. Tokyo’s figures often serve as a leading indicator for national trends.
The slowdown was primarily driven by softer growth in energy prices. Government subsidies for energy costs shaved off 0.51 percentage point from the overall price index in October.
Weaker price momentum, mainly driven by known technical factors, is unlikely to have a major impact on the BOJ’s upcoming policy decision. Officials see little need to rush into raising interest rates this month while they remain on track to hike at a later stage, according to sources familiar with the matter.
“The impact of today’s results on BOJ policy appears neutral,” said Takuya Hoshino, chief economist at Dai-ichi Life Research Institute Inc. “If prices were higher, it would have reinforced the BOJ’s view that the economy is on track, but that doesn’t seem to be the case.”
In the latest Bloomberg survey, almost all BOJ watchers see no move in October, with half expecting a rate hike in December. The board is set to announce the outcome of its two-day meeting next Thursday.
A deeper price gauge that strips out energy prices rose to 1.8% in October from 1.6%, pointing to continued underlying inflationary momentum. Prices for a variety of items are typically revised at the start of the second half of the fiscal year in October. A Teikoku Databank survey suggests that 2,911 food items saw price increases in October, marking the highest number in a year.
Service prices also rose 0.8% from a year before in October, up from 0.6%. This includes postal fees, as Japan Post Co. raised rates for ordinary mail by 30% this month, the first increase in 30 years.
What Bloomberg Economics Says...
“Tokyo’s October CPI data will probably add to concerns at the Bank of Japan about the risk of inflation overshooting its 2% target unless it tightens further. Core readings came in above the consensus forecasts.”
— Taro Kimura, economist
For the full report, click here.
Sticky inflation may affect public sentiment, a key concern for Prime Minister Shigeru Ishiba and his Liberal Democratic Party as they head into a general election on Sunday. Local media reports suggest that there is a chance the ruling party will face its biggest loss since 2009.
In an effort to raise his odds of success in the election, Ishiba has said there will be an extra budget that’s larger than last year to support those struggling with inflation, and to stimulate the broader economy. Still, he hasn’t provided details about specific measures, including whether utility subsidies will be extended through year-end.
Wage negotiations for next year will also be affected by the pace of price gains. This year some Japanese workers secured the largest wage hike in 33 years at 5.1%, driven in part by companies’ desire to retain staff amid rising prices. For next year, Japan’s largest union federation Rengo announced plans last week to seek a 5% or more wage hike, maintaining this year’s target.
Beyond the impact from price relief measures, the currency trend will remain a source of uncertainty for inflation. Amid stronger-than-expected US economic data, the yen traded around 152 to the dollar on Friday morning, after recently crossing the 150 threshold. This has partly led to Japan’s imports growing in value, adding pressure on households and businesses reliant on foreign energy and food.
(Updates with more details from report, economist comments)
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