Japan inflation reached 3% for the first time since 1991

Inflation in Japan has reached 3% for the first time in three decades, which only reinforced doubts about the need for further central bank stimulus for the currency.

The year-on-year increase in consumer prices in September, excluding fresh produce, was in line with analysts' forecasts. 

The inflation rate was the highest in 1991, not counting the spike in 2014, when a sales tax increase affected pricing. 

The acceleration in prices is likely due to investors stepping up their bets again against Bank of Japan policy.The level on ten-year swaps signals that at least some traders are betting on the central bank's capitulation to its yield limits on 10-year bonds. These central bank measures were intended to stimulate the economy.

Nevertheless, despite market speculation and an extended period of rising prices above the 2% target, economists expect the Bank of Japan to back its ultra-soft policy strategy at next week's meeting.

While energy indicators continued to be the biggest contributor to price growth, further acceleration of inflation in September was driven by higher prices for food and durable household goods.This result indicates that inflation is already spreading beyond the energy sector.

Mari Iwashita, chief market economist at Daiwa Securities Co, said inflation could reach 3.3% or 3.4% in October as prices rise for food, cell phone rates and various services in general.

Bloomberg Economics economist Yuki Masujima said they expect inflation to peak at 3.1% in Q4 and then slow to 2.8% in Q1 2023. A weaker yen is likely to raise the cost of imports. Masujima also noted that, on the other hand, inflation could fall to 0.25% thanks to nationwide travel subsidies starting October 11.

At the same time, wage growth continues to lag behind inflation, with the latest real wage data showing a 1.7% year-on-year decline.

The Bank of Japan has reportedly raised its forecast for core consumer inflation for the current year. Nevertheless, the Bank still expects price growth to fall below 2% going forward.