Tokyo inflation exceeds BOJ’s 2% target before rate decision

The pace of consumer inflation in Tokyo remained well above the Bank of Japan’s 2% target, underscoring persistent price pressures just hours before the central bank’s board is expected to hold its policy settings steady.

Consumer prices excluding fresh food rose 2.6% in October from a year earlier in the capital, as the pace slowed slightly from 2.7% in September, the Ministry of Internal Affairs and Communications reported Friday. The reading matched economists’ median forecast.

Overall inflation in the capital stood at 2.8%, while prices excluding fresh food and energy, a key gauge of underlying inflation, climbed 2.6%. Economists had forecast both measures would show 2.7% gains. Tokyo’s inflation data serve as a leading indicator for nationwide trends, although localized steps to cap living costs sometimes distort that relationship.

In the latest month, subsidies to reduce electricity and city gas bills over the summer months helped cap price pressure, an effect likely to fade in coming months. For that reason, Friday’s figures won’t likely derail the BOJ from conducting rate hikes in coming months. While the bank is widely expected to hold policy steady Friday, the overnight swaps market showed traders were pricing in a roughly 80% probability of a hike in December as of Friday morning in Tokyo.

Even with the subsidies, energy prices contributed to gains in the index, as costs for electricity and natural gas rose 1.7% and 4.9%, respectively, as both components reversed from declines in the previous month. Price gains for lodging accelerated to 6.7% year on year, while price advances for processed food slowed a tad.

Speculation over a near-term BOJ rate hike would build if Gov. Kazuo Ueda declares — as expected — that underlying inflation has finally come in line with the bank’s 2% target more than 13 years after the bank first adopted that goal. Data earlier this week showed that consumer prices excluding fresh food and special factors such as subsidies rose 3.2% in September from a year earlier, the highest in three years and a pace substantially faster than the official 2.1% gain in the national CPI report last week.

The BOJ has warned that developments including the Middle East conflict and a persistently weak yen are amplifying upside risks to prices.

Tokyo’s key price gauge had stayed below 2% for seven straight months through August, largely due to government relief measures that included waivers for water bills and expanded childcare subsidies on top of various steps to curb energy inflation. As those measures are phased out, the figures may provide a clearer picture of underlying price strength.