Image Source: Pixabay
 

Inflation remained at elevated levels in November
 

Tokyo's CPI inflation in November was steady, with headline inflation up 2.7% year-on-year and core inflation up 2.8%, largely in line with market expectations. Utilities rose 2.4% as government subsidies ended. Service prices, an important gauge of demand-driven inflation, rose modestly by 1.5%.

In the monthly comparison, it rose 0.3% month on month, seasonally adjusted, with goods and services up by 0.5% and 0.2%, respectively. Although growth slowed compared to the 0.6% gain seen in October, the data still indicated persistent upward pressure.

Going forward, we expect headline inflation to decline, likely to below 2%. Rice prices, which had been rising 90% in early summer, decelerated to 40% in November. We expect further deceleration in the coming months. Also, the government’s new economic package will focus on lowering energy prices. This will likely lower headline inflation. Still, we believe core inflation is likely to remain around current levels, driven by a weak JPY and strong wage growth.

Inflation rose well above 2% in November
 

Source: CEIC

Monthly activity data beat market consensus, showing a clear recovery sign of the economy
 

We believe manufacturing activity has normalised once a trade agreement was officially reached between the US and Japan. It seems like the auto sector is benefiting the most. Industrial production extended its solid gain for a second month, unexpectedly rising 1.4% MoM in October (vs 2.6% in September, -0.6% market consensus). The most notable gains were from cars and petrol chemicals. Car output rose 7.2% in October, recording three consecutive monthly rises. Petro-chemicals also extended their gains for the second month. Retail sales increased by 1.6% MoM, compared to a revised flat reading in September and the market consensus of 0.8%. Growth was broad-based across major categories, with auto sales posting the largest increase at 10.9%.

GDP and BoJ outlook
 

Today's data indicate that the economy is recovering following a temporary contraction in the third quarter of 2025. The robust performance of the automotive sector was particularly noteworthy. We anticipate GDP growth of 0.2% quarter-on-quarter in the fourth quarter of 2025. The current data support our projection, but introduce some potential upside risks.

The Bank of Japan has expressed concern that US tariffs might negatively impact the economy. However, today's data is expected to boost the BoJ's confidence in Japan's economic growth. Given steady inflation and the ongoing recovery of the economy, we believe the likelihood of a rate hike on 19 December has increased.

More By This Author:

Italian Confidence Data For November Sends Contrasting Signals
Eurozone Sentiment Is Gradually Improving
FX Daily: Reeves Keeps Sterling Afloat