Tokyo core CPI holds at 2.5%

According to government data on Friday, inflation in Tokyo grew 2.5% year-on-year in September, falling short of forecasts of 2.8%, though it held steady from August rates.

The “core-core” rate, excluding fresh food and energy prices, cooled to 2.5% in September after hitting 3.0% in August. While still above the BOJ’s 2% target, the pullback has spurred yen weakness and sharpened focus on the US CPI report later in the day.

Tokyo’s inflation figures are often seen as a preview of nationwide trends. Friday’s numbers signaled a slowdown in underlying price growth, potentially making it harder for the Bank of Japan to justify more rate hikes. Nonetheless, the unchanging main gauge shows the data’s sensitivity to government measures, reinforcing why the BOJ is unlikely to base its rate decisions on just one data release.

Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute, even commented, “With today’s Tokyo data not showing much change other than the special one-off factors, I don’t think this will prevent the BOJ from mulling a rate hike. This won’t push the BOJ, but it won’t make them hesitate either, as factors are clear.”

Rice prices dropped to 46.8% from 67.9% in August

Energy prices were a key driver of September’s inflation, with the impact amplified by a smaller drag from government utility subsidies compared with last year. Subsidies cut 0.5% from overall inflation in September 2024, versus 0.3% this year, creating a base effect that led to the first annual rise in energy costs in three months.

The broader free daycare program, introduced this month, also trimmed 0.3% from inflation, and water prices also slipped, dragging the index lower.

Shinke remarked, “The expanded free daycare was the factor that brought the Tokyo CPI much lower than market consensus. The daycare fees offset a boost from base effects from last year’s utility subsidies. Other than that, there was little surprise.”

The annual rise in rice prices also eased to 46.8% from 67.9% in August, extending a five-month streak of deceleration. More moderation is anticipated, though households may not feel much relief yet.

Japan’s central bank maintained rates at 0.5%

Prime Minister Shigeru Ishiba stepped down this month after suffering multiple election setbacks that cost him party backing. Much of the discontent stemmed from the ongoing cost-of-living squeeze. The race to head the Liberal Democratic Party has drawn five candidates, all of whom have vowed to address household cost pressures. The leadership election will be held on Oct. 4.

Meanwhile, Japan’s central bank decided to keep rates steady at 0.5% on Friday, as markets had predicted. However, Friday’s decision wasn’t unanimous: board members Naoki Tamura and Hajime Takata opposed holding rates steady. The dissent spurred markets to see around a 50% probability of a rate change at the Oct. 30 meeting, more than double previous expectations.

Former BOJ board member Makoto Sakurai said the bank can hike rates when it sees fit, with inflation still rising. He added, however, that the timing will depend on how carefully officials want to review the economic fallout from US tariffs.

Tokyo’s housing market is still heating up, with prices in the city’s 23 central wards surging. Tokyo Kantei data shows that the average price of a second-hand family condo jumped 38% in August from a year earlier to ¥107 million ($719,680).