Japanese inflation is rising again! New Prime Minister Takamichi Sanae faces first test after taking office.

Due to the increase in energy costs, Japan's core inflation rate has accelerated, highlighting the governance challenge facing the new Prime Minister, Kanetsugu Sonae, while also likely allowing the Bank of Japan to continue on its path of raising interest rates. Data released by the Ministry of Internal Affairs and Communications in Japan on Friday showed that the consumer price index (CPI) excluding fresh food rose by 2.9% year-on-year in September, higher than August's 2.7%, marking the first acceleration in four months. This data is in line with the median expectations of economists, with most economists believing that last year's larger utility subsidy policy has pushed up inflation data this year. This inflation report is the first relevant report since Kanetsugu Sonae took office as Prime Minister on Tuesday, providing support for her prioritized task of addressing the cost of living crisis. Japan's core inflation index has been maintained at or above the Bank of Japan's 2% target level for three and a half years, keeping the central bank on a path of raising interest rates. Most economists expect the next rate hike to possibly land in December or January next year. Taro Saito, head of economic research at NLI Research Institute, stated, "The biggest factor driving the acceleration of core inflation is the impact of last year's widespread energy subsidies. Based on this data alone, it will not change the Bank of Japan's stance on interest rate hikes." He believes that the Bank of Japan will maintain the policy rate next week. Energy prices rose by 2.3% year-on-year, a significant reversal from the 3.3% decline in August. To help households cope with the hottest summer on record from July to September, the government implemented utility subsidies. However, the impact on inflation data typically lags by a month, and this year the scale of electricity subsidies has decreased by about 40% compared to last year. At the same time, rice prices, one of the main drivers of inflation this year, increased by 49.2% year-on-year, continuing to slow down and significantly dropping from 69.7% in August, but still at a high level. As a result, the inflation rate for processed foods decreased from 8% to 7.6%. Economist Taro Kimura commented, "The acceleration of inflation in September highlights the policy challenge facing the Bank of Japan - price pressures are still strong, but policymakers are cautious about tightening monetary policy too soon. The latest CPI data in Japan shows that the rise in energy costs and wage increases are driving prices higher in labor-intensive service industries, indicating a continued strong momentum in price increases." Bank of Japan Governor Haruhiko Kuroda has emphasized that the three major factors to consider when deciding on the timing of the next rate hike are food inflation, the condition of the U.S. economy, and the impact of U.S. tariff policies. Most economists expect the Bank of Japan to maintain the policy rate at the central bank policy meeting next week. A core index closer to potential inflation, excluding energy prices, rose by 3.0%, slightly slowing down from 3.3%. Service prices, a key component of sustainable inflation, increased by 1.4% year-on-year, slightly easing compared to the previous month. Saito pointed out, "This data confirms that with the slowdown in rice price increases, food inflation has peaked. This means that core inflation may further decline in the coming months." During a inauguration press conference this week, Kanetsugu Sonae stated that addressing inflation is her top priority. Her government has been working on formulating an economic package to mitigate the impact of inflation on families and businesses. It is expected that she will deliver a policy speech in parliament later on Friday, further clarifying her governing intentions. Kanetsugu Sonae's sense of urgency stems from the fact that in the past two general elections, years of high inflation were a major reason why her ruling party, the Liberal Democratic Party, lost its majority in both houses. Meanwhile, Governor Haruhiko Kuroda remains cautious about raising borrowing costs, emphasizing that the potential inflation rate is still below the 2% target level. The latest survey shows that due to Kanetsugu Sonae's previous inclination towards supporting monetary easing, 90% of Bank of Japan observers expect that the Bank will not raise interest rates when announcing the next policy decision on October 30. December is the most widely accepted time for a rate hike, with half of the respondents expecting action to be taken at that time. Saito said, "The Bank of Japan may hope to raise interest rates in December or early next year. But facing Kanetsugu Sonae's policy preferences and the slowdown in inflation, the Bank may face greater challenges in moving forward with rate hikes in the future."