Japan's Core CPI Exceeds Expectations, Raising Interest Rate Speculation

According to BlockBeats, Japan's Ministry of Internal Affairs and Communications released the October Consumer Price Index (CPI) data, revealing that the core CPI, excluding fresh food prices, rose by 2.3% year-on-year. This figure slightly surpassed market expectations of 2.2% but showed a decrease from September's 2.4%. The change is attributed to the base effect of last year's government fuel subsidy cuts. Additionally, the CPI excluding fresh food and energy prices increased by 2.3% from 2.1% in September, indicating persistent demand-driven inflation pressures. Service prices also saw an annual increase from 1.3% in September to 1.5%, suggesting that businesses may be passing rising labor costs onto consumers. These figures indicate that Japan's inflation rate remains above the Bank of Japan's (BOJ) 2% target, providing a rationale for a potential interest rate hike next month. The BOJ is scheduled to hold its interest rate decision meeting on December 18-19. A survey by the London Stock Exchange, as of November 22, shows that 55% of economists predict the BOJ might raise rates by 25 basis points, increasing the benchmark policy rate from 0.25% to 0.5%. Marcel Thieliant, Head of Asia-Pacific at Capital Economics, also sees a high likelihood of a rate hike, citing rising underlying inflation, a rebound in consumer spending, and the continued weakening of the yen as factors supporting this move. Furthermore, the BOJ's latest opinion summary suggests that if prices and economic performance align with expectations, the BOJ could raise the policy rate to 1% by the second half of the 2025 fiscal year. However, BOJ Governor Kazuo Ueda has not provided clear guidance on the timing of a rate hike, stating that the BOJ is prepared to raise rates again as long as Japan's economy can sustainably achieve its price target, driven by strong domestic demand and steady wage growth. Many economists anticipate that if the BOJ does not raise rates at the next meeting, it may choose to increase the benchmark rate in January next year. Bloomberg economists further predict that the BOJ might raise rates by 25 basis points in January, April, and July next year, forming a more restrictive monetary policy path. If the BOJ decides to raise rates next month, it would mark the second hike since July this year. In September, the BOJ opted to keep rates unchanged, considering factors such as global economic uncertainty, financial market volatility, and the yen's strength. The financial market volatility following the July rate hike, particularly the unwinding of yen carry trades, remains a concern. Yen carry trades involve borrowing yen at low interest rates to invest in higher-yielding assets. However, a rate hike increases borrowing costs and narrows profit margins for these trades, while also potentially appreciating the yen, adding exchange rate risk. Under these pressures, many traders may choose to unwind their positions, leading to tightened market liquidity and potential market turmoil. With the possibility of another rate hike next month, the market is already reflecting this expectation, as evidenced by the yen's 0.4% intraday appreciation against the US dollar following the data release. If the rate hike materializes, the yen could strengthen further, necessitating close monitoring of global capital market movements.