Japan's October service inflation remains stable, reinforcing the outlook for central bank interest rate hikes

According to the Zhitong Finance APP, data released on Tuesday showed that the leading indicator of Japan's service industry inflation remained around 3% in October, further confirming that conditions for the Bank of Japan to raise interest rates again are forming.

Despite the uncertainty surrounding the policies of U.S. President-elect Trump casting a shadow over the outlook, many analysts expect Japan's economy to maintain a moderate recovery, which will help keep the inflation rate close to the central bank's target of 2%.

Data from the Bank of Japan showed that the Producer Price Index for Japan's service industry rose 2.9% year-on-year in October, an increase from 2.8% in September.

This growth was driven by services such as machinery maintenance, accommodation, and construction, reinforcing the central bank's view that rising wages are prompting more companies to pass on higher labor costs through price increases.

These data will be one of the factors reviewed by the Bank of Japan at its next policy meeting in December, with some analysts expecting the central bank to raise the current rate of 0.25%.

"Service industry inflation is expanding, although the momentum is not as strong as the Bank of Japan suggests," said Seisaku Kameda, former chief economist at the Bank of Japan and now executive economist at Sompo Institute Plus.

He stated, "That said, the Bank of Japan must be satisfied with the way wages and service industry inflation are rising." He expects the Bank of Japan may raise interest rates in December.

There are signs that achieving sustained wage growth remains a top priority for the government, with Prime Minister Shigeru Ishiba stating on Tuesday that he would ask companies to implement "significant" pay raises in next year's labor negotiations with unions.

Trump Risk Approaches

The Bank of Japan is closely monitoring service industry inflation to look for clues on whether demand-driven price increases are expanding enough to justify further interest rate hikes.

The data for October is particularly noteworthy, as many Japanese companies typically adjust service prices semi-annually in April (the start of the fiscal year) and October.

Tuesday's data was released following last week's consumer inflation data, which showed that service prices charged by companies to households rose 1.5% year-on-year in October, up from 1.3% in September.

Bank of Japan Governor Kazuo Ueda has stated that the economy is moving towards sustained wage-driven inflation, which could lead the central bank to raise the currently low interest rates again.

Ueda mentioned at a press conference last week, "We see progress on the domestic front." He pointed out that there are increasing signs that wage increases will continue, prompting companies to raise not only product prices but also service prices.

Slightly more than half of the economists surveyed expect the Bank of Japan to raise interest rates again at its meeting on December 18-19.

The biggest complicating factor for further interest rate hikes by the Bank of Japan may be Trump's policies, which promise high tariffs on Canada, Mexico, and China, triggering a rebound in the dollar and a decline in Asian stock markets.

While maintaining its assessment of a moderate recovery, the Japanese government warned on Tuesday that Trump's policies could impact the Japanese economy, including causing market volatility Masakazu Tokura, chairman of the Japan Business Federation, stated on Tuesday that Trump's tariffs could cause "serious" damage to Japanese companies.

The Bank of Japan ended its negative interest rate policy in March and raised the short-term policy interest rate to 0.25% in July, as Japan is steadily achieving its 2% inflation target. Kazuo Ueda indicated that if the inflation rate stabilizes at 2% as expected, the Bank of Japan will continue to raise interest rates