Tokyo Inflation Slows Below 2% Ahead of Election, BOJ Meet

(Bloomberg) — Inflation in Tokyo slowed below 2% for the first time in five months largely due to energy prices, as the country heads into a general election and the Bank of Japan mulls data for its policy decision next week.

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Consumer prices excluding fresh food rose 1.8% in the capital in October, marking the second month of deceleration, the Ministry of Internal Affairs reported Friday. The reading slightly exceeded economists’ estimates of 1.7%. Tokyo’s figures often serve as a leading indicator for national trends.

The slowdown was primarily driven by softer growth in energy prices. Government subsidies for energy costs shaved off 0.51 percentage point from the overall price index in October.

Weaker price momentum, mainly driven by known technical factors, is unlikely to have a major impact on the BOJ’s upcoming policy decision. Officials see little need to rush into raising interest rates this month while they remain on track to hike at a later stage, according to sources familiar with the matter.

“The impact of today’s results on BOJ policy appears neutral,” said Takuya Hoshino, chief economist at Dai-ichi Life Research Institute Inc. “If prices were higher, it would have reinforced the BOJ’s view that the economy is on track, but that doesn’t seem to be the case.”

In the latest Bloomberg survey, almost all BOJ watchers see no move in October, with half expecting a rate hike in December. The board is set to announce the outcome of its two-day meeting next Thursday.

A deeper price gauge that strips out energy prices rose to 1.8% in October from 1.6%, pointing to continued underlying inflationary momentum. Prices for a variety of items are typically revised at the start of the second half of the fiscal year in October. A Teikoku Databank survey suggests that 2,911 food items saw price increases in October, marking the highest number in a year.

Service prices also rose 0.8% from a year before in October, up from 0.6%. This includes postal fees, as Japan Post Co. raised rates for ordinary mail by 30% this month, the first increase in 30 years.

What Bloomberg Economics Says…

“Tokyo’s October CPI data will probably add to concerns at the Bank of Japan about the risk of inflation overshooting its 2% target unless it tightens further. Core readings came in above the consensus forecasts.”