In Japan, inflation accelerates… and the pace of rate hikes?

Inflation rose to 3% in October, increasing the likelihood of a further Bank of Japan (BoJ) rate hike. Consumer prices in the archipelago have now topped the central bank's 2% target for the 43rd consecutive month, a streak unseen since 1992.

Annualized inflation. Source: Trading Economics

To complicate the BoJ's issue, the government is pressing for a budgetary stimulus. Local media reported that on Friday Prime Minister Takaichi's government approved a plan worth €117bn, including subsidies for energy bills and tax cuts.

The government is trying to address public discontent regarding inflation: however, stimulus is rarely sufficient to bring down inflation.

While the BoJ has paused since January (after several rate hikes), this is mainly due to American tariff duties and their potential negative effects on activity. These effects were visible in Q3 figures, when GDP contracted at an annualized rate of 1.8%.

However, data released this morning tends to reassure on growth momentum. The PMI index rose to 52, aided by a rebound in the manufacturing component, while exports grew (+3.6% y-o-y). Higher exports to the rest of the world more than offset declines to the US.

Even though all arguments for a rate hike are on the table, markets still expect the BoJ to wait until January to act.

Nevertheless, the December meeting could show more members backing a rise. As a reminder, there were two votes in favor of a hike in October.