Japan’s Core Inflation Reaches Three-Month High, Strengthening Case for Rate Increases

Japan’s core consumer inflation accelerated in October to its fastest pace since July, matching market expectations and reinforcing the argument for additional interest rate increases by the Bank of Japan.

Core inflation, which excludes fresh food prices, rose to 3% in line with the forecast from economists surveyed by Reuters. Headline inflation also came in at 3%, marking the forty-third consecutive month above the Bank of Japan’s 2% target.

The core inflation measure, which excludes both fresh food and energy, inched up to 3.1% from 3% in September, reflecting continued price pressure across a broad range of goods and services.

Rice prices, which surged earlier this year, continued to cool for the fifth straight month, slowing to a 40.2% increase from 49.2% in September.

Financial markets reacted cautiously to the data. The Nikkei 225 fell 1.58%, while the yen strengthened slightly to 157.5 per dollar as senior officials expressed renewed concern over currency volatility.

Bank of Japan Governor Kazuo Ueda told lawmakers that a weaker yen could add to underlying inflation by raising import costs and pushing up broader prices. Finance Minister Satsuki Katayama also signaled heightened concern, suggesting that authorities may intervene if the yen experiences further sharp, one-sided movements.

According to LSEG data, the dollar has risen 2.19% against the yen so far in November and gained 9.52% over the past six months.

Ueda also met this week with newly elected Prime Minister Sanae Takaichi. During their meeting, he reiterated that the Bank of Japan is gradually adjusting interest rates to guide inflation toward its 2% target while supporting stable and sustainable growth. Takaichi, who favors continued loose monetary policy, told parliament earlier this month that she hopes inflation settles at 2% through wage growth rather than higher import costs. She also criticized the current inflationary pattern as undesirable.

Ueda noted that Takaichi made no specific requests regarding monetary policy.

The central bank faces a difficult backdrop, with inflation remaining above target while Japan’s growth momentum weakens. The economy contracted in the third quarter for the first time in six quarters, shrinking 0.4% from the previous quarter and 1.8% on an annualized basis. Policymakers have acknowledged that rising U.S. tariffs have placed additional strain on Japan’s outlook.