Consumer inflation in Tokyo, a leading indicator of the national trend, was stable at 2.8% in two key measures in November and eased in the total reading following a three-tick jump in October that was caused by the Tokyo metropolitan government's move to wrap up its four-month program to wave base charges for water supply during the heat wave at the end of September as planned.

Takeaway: The Bank of Japan's own measures to gauge underlying inflation have indicated that consumer prices are rising at an annual rate closer to the bank's 2% price stability target. The bank's policymakers are looking for signs of sustained wage hikes into fiscal 2026 starting in April, instead of focusing too much on CPI data, which is a lagging indicator. Judging from the summary of opinions expressed at the Oct. 29-30 meeting, the board is set to consider raising the policy rate in December or January, provided that the economy is showing resilience to weather the drag from stiff U.S. tariffs.

Details:
Japan Nov Tokyo Core CPI (ex-fresh food) +2.8% y/y (Oct +2.8%), median forecast +2.8% (range: +2.7% to +3.0%)

Japan Nov Tokyo Total CPI +2.7% y/y (Oct +2.8%); median forecast +2.8% (range: +2.6% to +3.0%)

Japan Nov Tokyo Core-Core CPI (ex-fresh food, energy) +2.8% y/y (Oct +2.8%); median forecast +2.8% (range: +2.6% to +2.8%)

Japan Nov Tokyo CPI: Energy +2.6% y/y (+0.14 point contribution), third straight rise vs. +2.2% (+0.11 point) in Oct

Japan Nov Tokyo CPI: Processed food +6.5% (+1.51 point) vs. +6.7% (+1.56 point) in Oct

Japan Nov Tokyo CPI: Regular rice price remains high at +38.5% y/y (+0.18 point on total CPI) from +38.4% (+0.18 point) in Oct

Japan Nov Tokyo CPI: Hotel fees +9.2% (+0.14 point) vs. +8.5% (+0.13 point) in Oct

Consumer inflation in Tokyo, a leading indicator of the national trend, is expected to have been little changed in November from the previous month. The government’s measures to curb gas and electricity prices are scheduled to end during the month, a shift that is expected to put upward pressure on prices. In addition, the Tokyo metropolitan government’s removal of its free base charge for water bills is seen adding to the firmness in overall prices.

The core measure (excluding fresh food) is forecast to rise 2.8 percent on year in November, unchanged from October. Two other key gauges, the overall CPI and the core-core index (excluding fresh food and energy), are also expected to increase 2.8 percent, both essentially flat from the previous month. All three readings have remained below 3 percent since June after easing from earlier peaks.

Food price gains have shown signs of slowing, although the moderation has been limited. Rice prices continue to climb, and other food categories remain firm.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Annual changes in the CPI represent the rate of inflation.

The Tokyo CPI data covers consumer prices in the capital’s 23 wards located in the eastern part of the Tokyo Prefecture but excludes the 26 cities and other smaller municipalities that occupy larger areas in other parts of the province (islands in the Pacific Ocean are also excluded). It is a leading indicator of the national average CPI as it is released about a month ahead of the national data. The survey for the Tokyo CPI is conducted on one day around the 12th (Wednesday, Thursday or Friday) each month and its results are released toward the end of the same month or early in the following month.

The national CPI has a larger energy weight of 712 out of 10,000, compared to 470 in the Tokyo data, because the shares of consumption of electricity, gasoline and heating oil tend to be bigger in the rural areas. There is only a slight difference in the weighting of food excluding perishables between the national data (2,230) and the Tokyo data (2,144).

The CPI has been in the spotlight as Japan struggled to make its way out of deflation. It is now closely monitored because the recent spike in energy and commodity markets and supply chain constraints during the global pandemic boosted Japan’s inflation rate to the highest in over four decades in 2022.

The report tracks changes in the price of a basket of goods and services that a typical Japanese household might purchase. The preferred measure is the year over year percent change. Markets will typically pay more attention to the core measure that excludes only fresh food because volatile food prices can distort overall CPI. A second core measure that excludes energy as well is also available. As the most important inflation indicator, the CPI data are closely monitored by the Bank of Japan. Rising consumer prices may prompt the BoJ to raise interest rates in order to manage inflation and slow economic growth. Higher interest rates make holding the yen more attractive to foreign investors, and this higher level of demand will place upward pressure on the value of the yen.

An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to government securities. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.