Water bills triggered the "inflation bomb" in Tokyo, the Bank of Japan's rate hike was supported, and the yen rose in response.

The inflation rate in Tokyo is showing an accelerating trend, providing a basis for the Bank of Japan to continue gradual interest rate hikes, while also pushing the yen exchange rate higher. Data released by the Japanese 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, with the main driving factor being an increase in water fees. Economists had previously expected the index to rise by 2.6%, while the increase in September was 2.5%. Price increases nationwide in Japan have remained at or above the Bank of Japan's 2% target level for three and a half years, but Governor Haruhiko Kuroda still believes there is a gap in the potential trend of inflation 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 overall inflation also recording a 2.8% increase. Following the release of the data, the yen rose to 153.82 against the US dollar, as of the time of writing, compared to around 154.17 before the data was released. "I believe that the Bank of Japan Policy Board, especially Governor Kuroda, is cautious about raising interest rates," said Taro Saito, chief economist at the NLI Research Institute. "They are considering the risk that Trump's tariffs could put pressure on the underlying economy. While it is uncertain whether the situation will be 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 lower gasoline taxes during this session of the Diet, reduce electricity and gas fees in winter, provide additional subsidies to local governments, and raise the income threshold for tax exemptions. As the water fee subsidy policy in Tokyo has expired, water fees in October remained the same year-on-year, while in September the subsidy had led to a 34.6% decrease in water fees. In addition, energy and processed food prices fell slightly in October. Economist Taro Kimura interpreted, "The unexpected rise in inflation in Tokyo in October indicates that the Bank of Japan may start raising interest rates earlier. In the second half of this fiscal year, businesses are raising prices for household goods and labor-intensive services, while the termination of the Tokyo water fee subsidy policy is further driving up inflation." Although Tokyo CPI data is a leading indicator of nationwide inflation trends, individual subsidy policies that only affect Tokyo may 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 beating expectations, industrial output in the third quarter fell slightly by 0.1% month-on-month, reversing the 0.4% growth in the previous quarter. Meanwhile, retail sales in September increased by 0.3% month-on-month and 0.5% year-on-year, much lower than the inflation rate, and both figures were below expectations. Japan's unemployment rate remained stable at 2.6% in September, with the job-to-applicant ratio maintained at 1.20, meaning there were 120 job openings for every 100 job seekers. The Federal Reserve is facing huge political pressure to adjust interest rates, unlike the United States, the Bank of Japan has not faced much public pressure on its policies even in the case of inflation exceeding the target. Takaichi Sanae, 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 of the Bank of Japan, but in September 2024, she described raising interest rates as a "foolish act," which attracted widespread attention. The Bank of Japan announced on Thursday that it would maintain its benchmark interest rate unchanged. Prior to this, market observers in a Bank of Japan survey had postponed their expectations for the timing of the next rate hike, with about half of the respondents believing that December was the most likely month for the next rate hike.