Japan CPI preview: core seen at 2.1%, topping BoJ target for first time since December

USD/JPY has held a tight range this month between just under 157 and just under 159, with the 200-day EMA just above 157.50. A firm print would test the lower end of that range, while a soft one would push the pair back toward 159, where intervention risk becomes the main defence for the yen. In JGBs, the 2-year and 5-year sectors are the most exposed to any repricing of December hike odds, with the 5-year yield near 2.3%. For the Nikkei, a stronger yen and firmer rate expectations would usually hurt exporters and help banks, but AI-linked flows are likely to matter more than the CPI unless the surprise is large. Oil remains the wildcard: sustained crude strength tied to the Middle East conflict keeps energy feeding into Japanese inflation and into the BoJ’s upcoming forecasts.--- Japan’s core inflation is forecast to clear the BoJ’s 2% target again, which would weaken the case for patience and strengthen the case for a December hike.Summary:Japan’s national September CPI is due at 2330 GMT Thursday (7:30pm US Eastern), and core inflation (ex fresh food) is expected at 2.1% against 1.7% in August.Headline inflation is seen at around 2.1% from 1.9%, and the ex fresh food and energy measure at around 2.3% from 1.9%.Tokyo’s September data beat forecasts by a wide margin, with core at 2.7% and ex food and energy at 3.0%, pointing to upside risk.The BoJ raised rates to 1.25% in September on a 7-2 vote and is expected to hold at its October 29-30 meeting, with December seen as the next likely move.The 10-year JGB yield has eased to around 2.9% on safe-haven demand, and USD/JPY has held near 158.A September trade deficit about three times the forecast continues to weigh on the yen. Japan’s nationwide consumer inflation data for September, due at 2330 GMT on Thursday (7:30pm US Eastern), is expected to show core inflation back above the Bank of Japan’s 2% target for the first time since December. That result would strengthen the case for another rate rise before the end of the year.Core CPI, which excludes fresh food but includes energy, is forecast to have risen 2.1% from a year earlier, according to a Reuters poll of 15 economists, up from 1.7% in August. Economists attribute much of the expected pickup to higher energy costs linked to the Middle East conflict reaching household bills. Other analysts expect headline inflation to rise to around 2.1% from 1.9%. They see the measure that excludes both fresh food and energy, often treated as a gauge of underlying price pressure, at around 2.3%, up from 1.9%.The risk appears tilted toward a firmer reading. Tokyo’s September figures, released earlier this month, ran well ahead of forecasts: headline and core inflation both reached 2.7%, and the ex food and energy measure hit 3.0%. The Tokyo data are published about three weeks before the national numbers and are widely used as a leading indicator. The comparison is not exact, however. Part of the Tokyo jump came from the expiry of some government support measures, while nationally, electricity subsidies were still holding power prices down in August, when they were about 2.4% lower than a year earlier.The release comes at a sensitive point for the central bank. The BoJ raised its policy rate to 1.25% in September, its second increase this year. The decision passed on a 7-2 vote, and the two dissenters argued that inflation was still running below target. Core inflation had stayed under 2% for seven consecutive months through August, including through both hikes. A core reading at or above consensus would weaken that objection less than a week before the October 29-30 policy meeting.Officials have increasingly emphasised upside risks. Governor Kazuo Ueda told parliament this week that underlying inflation is very close to the 2% goal. He cited strong global demand linked to artificial intelligence alongside a tight labour market. Deputy Governor Himino has warned of the danger of acting too late. Ueda has also described the bank’s task as anchoring inflation around 2%, rather than trying to lift it as it did during the deflation era.Even so, an October move is not the base case. Sources familiar with the bank’s thinking told Reuters that the BoJ is likely to keep rates on hold this month unless the yen weakens further and pushes up import costs. The sources said the bank is likely to raise its inflation forecast for next fiscal year as oil prices sustain price pressures for longer than expected, and to keep its focus on inflation risks, leaving room for a hike as soon as December. Market pricing assigns almost no chance to an October increase. Estimates of December odds vary by measure, from around 60% to about 80%.Japanese government bonds have rallied ahead of the data. The 10-year yield has eased to around 2.9%, its lowest since early September, after peaking above 3.1% in late September. The 30-year yield has fallen to near 3.9%, its lowest since early August. Safe-haven demand linked to the Middle East, fiscal strains in France and volatility in AI-related equities have supported the move. Analysts at MUFG expect the 10-year to trade between 2.85% and 3.00% this week. A firm inflation print would test that rally.The yen has been stuck. USD/JPY has spent much of October near 158, caught between expectations of further BoJ tightening and steady structural selling of the currency. Japan’s September trade deficit came in at around ¥540 billion, roughly three times the forecast, reflecting the yen that importers must sell to pay their bills. Finance Minister Katayama has not specified an intervention level, but the threat of official buying has helped limit the pair’s upside.Equities are likely to take their direction mainly from technology. The Nikkei briefly regained the 70,000 mark earlier this month on renewed AI optimism, before a global sell-off in AI and semiconductor shares hit sentiment.Beyond today’s data, the focus moves to next week’s BoJ quarterly outlook report. In it, the bank is expected to say that underlying inflation has roughly reached 2%, a signal of its readiness to keep raising rates. A national print that confirms the Tokyo signal would support that view. A reading below 2% would revive the dissenters’ argument and leave the yen relying more heavily on the threat of intervention.  This article was written by Eamonn Sheridan at investinglive.com.