Inflation in Japan was again above the central bank's target in September, at 2.9% overall, for the 42nd consecutive month. This is the context in which the new Prime Minister, Sanae Takaichi, will deliver her first speech to parliament today, in which she intends to outline the priorities for the new government. One of the main points is likely to be the cost of living, which has risen significantly faster than wages in recent years, contributing to a real wage loss, Commerzbank's FX analyst Volkmar Baur notes.

BoJ to continue raising interest rates at a very slow pace

"However, apart from isolated tax cuts and the temporary suspension of the gasoline tax, little structural change is expected. Problems in the agricultural sector, which appear to have contributed to the sharp rise in rice prices, do not seem to be on the agenda. Food price developments have been the main problem for inflation in recent months. Excluding these, the inflation rate in September was only 1.3%, well below the central bank's target."

"In fact, it has been below 2% since May last year. We therefore continue to expect that the central bank will not raise interest rates next week. However, we do see the possibility that the BoJ will take this step in December. Among other things, this is likely to depend on the plans presented by Takaichi today and, in particular, how these are implemented or prepared for implementation in the coming weeks."

"For the moment, we assume that the government's plans will neither address the structural problems that have led to cost inflation in the food sector in recent months. Nor will it present plans that will lead to a significant increase in wages. For inflation, this is likely to mean that the often-cited second force of demand-driven inflation is likely to be a long time coming. On the other hand, structural problems should lead to sustained latent inflationary pressure on the cost side. Overall, we expect this to cause the overall rate to fall back below 2% in the coming months. However, a return to zero inflation is unlikely. This environment should allow the Bank of Japan to continue raising interest rates at a very slow pace. This is not enough for a significant appreciation of the JPY against the US dollar, but it should be enough for stabilization."