By Leika Kihara and Takahiko Wada
TOKYO, Oct 2 (Reuters) – Annual core inflation in Japan’s capital accelerated in September at its fastest pace in 10 months, highlighting mounting price pressure and bolstering the case for further interest rate hikes from the central bank.
The data, widely regarded as a leading indicator of nationwide trends, will be among factors the Bank of Japan considers when it updates its quarterly inflation forecasts at its next policy meeting on October 29-30.
While market participants have reduced bets of a back-to-back hike this month, many expect the BOJ to raise its policy rate in December to forestall the risk of inflation overshoot.
“Even when discounting one-off factors, the inflation numbers are strong and show firms are steadily passing on rising costs from the weak yen and Iran war,” said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute.
“Nationwide core inflation will likely exceed 3% in coming months. With upside risks to underlying inflation, the BOJ will be on the hook for another rate hike as soon as December.”
The core consumer price index, which includes prices of fuel but not fresh food, in Tokyo rose 2.7% in September from the same month a year earlier, data showed on Friday, versus 1.8% in August and the median market forecast of 2.4%.
The figure was above the BOJ’s 2% target for the first time since January and represented the fastest year-on-year pace since a 2.8% rise in November.
An index stripping away the effect of volatile fresh food and fuel prices, which is closely watched by the BOJ as a more accurate gauge of trend inflation, rose 3.0% in September after a 2.0% gain in August, for its fastest year-on-year rise since August 2025.
While the jump was partly due to the phasing out of water bill and childcare subsidies, prices rose for a broad range of food items and daily necessities because of rising raw material costs.
Households also paid more for personal computers and tablets due to a spike in the prices of chips, the data showed.
“Core inflation will continue to accelerate as a trend due to rising energy costs from the Middle East conflict and subsequent second-round effects,” said Masato Koike, senior economist at Sompo Institute Plus, adding that he expects the BOJ to raise its policy interest rate in December.
Service-sector inflation hit 2.3% in September, accelerating from 1.4% the previous month, indicating that firms were passing on rising labour costs from a tight job market.
The BOJ raised its key rate to a 31-year high last month, with its governor signalling the bank has entered a phase focused on preventing underlying inflation from overshooting its target, raising the prospect of further rate hikes.
The bank has said underlying inflation, which is the broad, demand-driven price trend that strips away one-off factors, is close to its 2% target but has yet to meet it.
A primary factor would be how the recent rises in wholesale and consumer prices affect public perception of future price movement, which is crucial for anchoring underlying inflation around the BOJ’s target, analysts said.
In July, the BOJ forecast core consumer inflation of 2.5% in fiscal 2026 and 2.4% in 2027, reflecting a pass-through of costs from conflict in the Middle East.
Analysts are focusing on whether a renewed recent rise in crude oil prices could prompt the BOJ to raise its inflation forecasts in October.
“The second wave of the energy shock could keep inflation elevated longer than expected, which could embolden hawks in the BOJ board,” said Shinke at Dai-ichi Life Research.
(Reporting by Leika Kihara and Takahiko Wada; Editing by Jacqueline Wong and Christopher Cushing)
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