Core Inflation in Japan’s Capital Brings BOJ Closer to a Rate Hike

Reuters

10:53 JST, November 28, 2025

TOKYO, Nov 28 (Reuters) – Core consumer inflation in Japan’s capital stayed well above the central bank’s 2% target in November as firms continued to pass on rising costs mainly for food, data showed on Friday, reinforcing the case for a near-term interest rate hike.

Separate data for October showed retail sales and factory output rose while the jobless rate was steady at 2.6%, suggesting the world’s fourth-largest economy was weathering the impact of higher U.S. tariffs at least for now.

The slew of indicators will be among factors the Bank of Japan (BOJ) will scrutinize in deciding whether to raise interest rates in December, or hold off until next year.

“With the labor market still tight and inflation excluding fresh food and energy set to remain above 3% for now, the Bank of Japan will resume its tightening cycle over the next couple of months,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

The Tokyo core consumer price index (CPI), which excludes volatile fresh food costs, rose 2.8% in November from a year earlier, steady from October and roughly matching a median market forecast for a 2.7% gain.

A separate index for Tokyo that strips away both fresh food and fuel costs – closely watched by the BOJ as a measure of demand-driven prices – rose 2.8% in November from a year earlier, unchanged from the pace in October.

The increase in Tokyo CPI, a leading indicator of nationwide trends, was driven mostly by continued gains in food prices with the cost of rice up 38.5% year-on-year, a bag of coffee beans 63.4% higher and chocolate up 32.5%.

Service-sector inflation stood at 1.5% in November, largely unchanged from 1.6% in October and much more moderate than a 4.0% year-on-year gain in goods prices, the data showed.

The BOJ has said price rises must be driven by solid wage gains and robust domestic demand for inflation to durably hit its 2% target, and meet the conditions for further rate hikes.

But recent renewed declines in the yen may further push up food prices and broader underlying inflation, a point BOJ board member Asahi Noguchi made on Thursday in warning of the risk of waiting too long before raising rates.

YEN FALLS PUT FOCUS ON BOJ POLICY

Separate data released on Friday showed Japan’s factory output unexpectedly rose 1.4% in October from the previous month due to robust automobile production.

But manufacturers surveyed by the government expect industrial output to fall 1.2% in November and shrink 2% in December, suggesting the hit from U.S. tariffs could intensify in coming months.

The BOJ exited a decade-long, massive stimulus last year and raised interest rates to 0.5% in January on the view Japan was on the cusp of sustainably hitting its 2% inflation target.

While it has kept rates steady since then to gauge the economic impact of U.S. tariffs, stubbornly high inflation has shifted opinion in the BOJ board to increasingly favor a hike.

Reflationist advisers of Prime Minister Sanae Takaichi have warned against an early rate hike, pointing to weak consumption and data showing Japan’s economy shrank in the third quarter.

But the yen’s recent slump to 10-month lows could help the BOJ make the case to hike rates soon, as doing so could prop up the currency and ease the burden on households from rising import costs, some analysts say.