Japan's inflation hits 8-year high in test of BOJ's dovish policy

Japan's core consumer inflation rate accelerated to a fresh eight-year high of 3.0% in September, challenging the central bank's resolve to retain its ultra-easy policy stance as the yen's slump to 32-year lows continue to push up import costs.

The inflation data highlights the dilemma the Bank of Japan faces as it tries to underpin a weak economy by maintaining ultra-low interest rates, which in turn are fuelling an unwelcome slide in the yen.

The increase in the nationwide core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, matched a median market forecast and followed a 2.8% rise in August. It stayed above the BOJ's 2.0% target for the sixth month, and was the fastest pace of gain since September 2014, data showed on Friday.

The broadening price pressures in Japan and the yen's tumble below the key psychological barrier of 150 to the dollar will likely keep alive market speculation of a tweak to the Bank of Japan's dovish stance over coming months.

"The current price rises are driven mostly by rising import costs rather than strong demand. Governor Kuroda may maintain policy for the rest of his term until April, though the key is whether the government will tolerate that," said Takeshi Minami, chief economist at Norinchukin Research Institute.

The data heightens the chance the BOJ will revise up its consumer inflation forecasts in new quarterly forecasts due at next week's policy meeting, analysts say.

The yen's decline has been particularly painful for Japan due to its heavy reliance on imports for fuel and most raw material, forcing companies to hike prices for a wide range of goods including fried chicken, chocolates to bread.

The so-called 'core-core' index, which strips away both fresh food and energy costs, rose 1.8% in September from a year earlier, accelerating from a 1.6% gain in August and marking the fastest annual pace since March 2015.

The rise in the core-core index, which the BOJ closely watches as a key gauge of the underlying strength of inflation, toward its 2% target casts doubt on the central bank's view that recent price rises will prove temporary.

With Japan's inflation still modest compared with price rises seen in other major economies, the BOJ has pledged to keep interest rates super-low, remaining an outlier in a global wave of monetary policy tightening.

BOJ Governor Haruhiko Kuroda has stressed the need to focus on supporting the economy until wage growth picks up enough to compensate for the rising cost of living.

While Japan's labour union lobby has pledged to demand wage hikes of around 5% in next year's wage negotiations, analysts doubt pay will rise so much with fears of global recession and soft domestic demand clouding the outlook for many companies.

The September CPI data showed that while goods prices rose 5.6% year-on-year, services prices were just up 0.2% in a sign of how Japan's inflation is still driven mostly by cost-push factors.

"Consumer inflation is likely to slow in 2023. If so, any tweak to the BOJ's easy monetary policy will be minor even under the change to the bank's leadership next year," said Yasunari Ueno, chief market economist at Mizuho Securities.

Governor Kuroda will see his second, five-year term expire in April next year. The term of his two deputy governors will also end in March.