Water fees trigger inflation in Tokyo "bomb" Bank of Japan's interest rate hike gains support Yen rises in response

According to the Zhitong Finance APP, Tokyo's inflation rate is showing an accelerating upward trend, which provides a basis for the Bank of Japan to continue gradually raising interest rates, while also pushing the yen exchange rate higher. Data released by Japan's Ministry of Internal Affairs and Communications on Friday showed that the core consumer price index (excluding fresh food) in Tokyo rose by 2.8% year-on-year in October, primarily driven by an increase in water fees. Surveys indicated that economists had previously expected a median increase of 2.6% for this index, while the increase in September was 2.5%.

The price increase across Japan has remained at or above the Bank of Japan's target level of 2% for three and a half consecutive years, but Bank of Japan Governor Kazuo Ueda still believes that the underlying trend of inflation is still some distance from reaching this target. The core inflation rate in Tokyo, excluding fresh food and energy, rose from 2.5% in September to 2.8% in October, with the overall inflation rate also recording a growth of 2.8%.

After the data was released, the yen rose to an exchange rate of 153.82 against the US dollar, compared to approximately 154.17 before the data was announced.

"I believe the Bank of Japan's policy committee, especially Governor Ueda, is cautious about raising interest rates," said Taro Saito, head of economic research at the NLI Research Institute. "They are considering the risks that Trump tariffs may put pressure on the underlying economy. Although it is uncertain whether the situation will become clearer by January next year, I believe they will wait until then to take action."

Japanese Prime Minister Sanae Takaichi plans to implement new economic measures to alleviate the impact of rising prices on consumers and businesses. The new Prime Minister has promised to reduce gasoline taxes during the current parliamentary session, lower electricity and gas fees in winter, provide additional subsidies to local governments, and raise the tax-exempt income threshold.

With the expiration of the citywide water fee subsidy policy in Tokyo, water fees remained flat year-on-year in October; in September, the subsidy had caused water fees to decrease by 34.6% year-on-year. Additionally, energy and processed food prices saw a slight decline in October.

Economist Taro Kimura interpreted, "The unexpectedly high inflation in Tokyo in October indicates that the Bank of Japan may start raising interest rates sooner. In the second half of this fiscal year, companies are raising prices for household goods and labor-intensive services, while the termination of the Tokyo water fee subsidy policy further fueled the rise in inflation."

Although the Tokyo CPI data is a leading indicator of national inflation trends, the separate subsidy policy that only affects Tokyo can sometimes distort this transmission relationship.

In other economic data, Japan's industrial output grew by 2.2% month-on-month in September, exceeding the consensus expectation of 1.5%, and increased by 3.4% year-on-year. Despite the output data exceeding expectations, industrial output still fell by 0.1% month-on-month in the third quarter, reversing the previous quarter's growth of 0.4%.

Meanwhile, retail sales in September grew by 0.3% month-on-month and 0.5% year-on-year, far below the price increase, and both figures were below expectations.

Japan's unemployment rate remained stable at 2.6% in September, with the ratio of job vacancies to job seekers maintained at 1.20, meaning there are 120 job vacancies for every 100 job seekers.

The Federal Reserve is facing immense political pressure to adjust interest rates, while unlike the United States, the Bank of Japan has not faced much public pressure regarding its policies even when inflation exceeds its targets High City Saimi, who has always supported loose monetary policy, seems to lean towards the cautious strategy of the Bank of Japan. Since taking office as Prime Minister, she has not made any explicit demands on the Bank of Japan, but in September 2024, she referred to interest rate hikes as a "foolish move," which attracted widespread attention.

The Bank of Japan announced on Thursday that it would maintain the benchmark interest rate. Prior to this, central bank observers in market surveys had postponed their expectations for the timing of the next interest rate hike, with about half of the respondents believing that December is the most likely time for the next rate increase