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Japan Inflation Slows, Casts Doubts Over Rate Hike

A slower-than-expected rise in Japan's inflation rate threw cold water on hopes of an interest rate hike by the Bank of Japan (BOJ).

The core consumer price index (CPI) rose by 0.1% in October from a year earlier, below the a consensus forecast of 0.2%. This was attributed to smaller increases in gasoline prices. Some economists took cheer after stripping down the data.

"Some of the details were more encouraging," Tomoko Fuji, an economist with the Bank of America said on CNBC's Asia Market Watch. "For example, although core CPI only rose 0.1%, the data excluding food & energy actually improved a little bit."

Still, the softer-than-expected headline number led Japanese government bond futures to rally to a nine-month high, while the yen briefly declined on growing doubts that the central bank will tighten monetary policy when it meets in December.

The overnight call rate now stands at 0.25%, a level that was only increased in July after 6 years of near-zero rates.

SPENDING WEAKENS BUT JOBS IMPROVE

What appeared to be of greater concern was the steady decline in overall household spending. The government released data showing a fall by 2.4% in October from a year earlier, its tenth consecutive month of year-on-year declines, though the figure was slightly better than a consensus forecast of a 3.9% fall.

Adding to the economic picture was an improvement in jobless numbers. The unemployment rate fell to 4.1% in October from 4.2% the month before.

But Hiromichi Shirakawa, an economist at Credit Suisse noted that in spite of improving consumer confidence, spending remained cautious.

"The concern is the possible further weakening of demand, and that is the biggest issue right now." he said appearing on CNBC's Asia Squawk Box.

Shirakawa added that more stimulus was needed from the policy side.

"If they do hike interest rates and kill their interest expectations, consumption may not pick up and the Japanese economy may face trouble in the future." he said.

But economists are taking heart in BOJ governor Toshihiko Fukui's comments that the continued decline in unemployment will likely lead to increasing wages, a catalyst in boosting spending.

DIVIDED OVER RATES

The market has been divided over whether the Bank of Japan should raise interest rates, especially with this week's release of unexpectedly strong industrial output data. But with an expected slowdown in the U.S. economy at bay, economist feel the BOJ should only consider tightening monetary policy next year.

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