Japanese Inflation Rises, First Gain in 10 Months

Higher energy and food prices saw Japan's core consumer prices record their first annual rise in 10 months in October, but the modest 0.1 percent gain only slightly boosted expectations of a rate hike early next year.

As well, a fall in the number of job offers to the lowest in nearly two years raised concerns about the strength of the Japanese job market, one of the brightest spots in the economy.

"Rising raw material costs are hurting business sentiment at medium-sized and small companies, which are unable to pass rising costs on to their customers. That's why the job market is losing momentum," said Seiji Adachi, senior economist at Deutsche Securities.

Financial markets were transfixed by problems in the world's credit market, which have sent the yen gyrating, rather than the data, as investors expect the Bank of Japan to hold off raising interest rates until well into next year.

Swap contracts on the overnight call rates were pricing in less than a 30 percent chance of a rate hike by March, when BOJ Governor Toshihiko Fukui retires, up from around 25 percent previously.

The budding signs of rising prices in Japan's core consumer price index (CPI), which excludes fresh fruit, vegetables and seafood, was just above the median forecast from economists for a flat reading.

"The price data came out somewhat strong, due mainly to rises in energy-related and food prices, but it does not suggest significant improvements in the conditions. On a macroeconomic basis, upward pressures on prices remain weak," said Hiroshi Shiraishi, economist at Lehman Brothers.

Consumer prices in Tokyo, a leading measure of nationwide price trends, also rose 0.1 percent in November from a year earlier, in line with market expectations.

The BOJ has long said the CPI would rise in the long run as demand exceeds supply in the economy, and therefore the bank needs to gradually raise Japan's very low interest rates to more normal levels to avoid the risk of overheating.

There have been plenty of anecdotal reports of price rises, from gasoline to bread, and the modest rise in CPI gives some ammunition to the BOJ's case for gradual tightening.

But consumer prices still lag far behind bigger rises in wholesale prices, squeezing corporate profits and hurting consumer sentiment.

"There is a possibility of mini-stagflation, in which rises in prices of daily goods only dampen consumer sentiment and hurt the overall economy," said Shiraishi at Lehman.

Government data also showed on Friday that Japan's seasonally adjusted jobless rate stood at 4.0 percent in October, unchanged from September, and the same as the consensus market forecast.

The jobs-to-applicants ratio worsened to 1.02 in October from 1.05 in September. The ratio means there are now 102 jobs available for every 100 job seekers.

"An improvement in job conditions may be slowing somewhat, which bodes ill for personal consumption." said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute.

The BOJ, which will next review rates on Dec. 19-20, has kept them unchanged since raising its key policy rate to 0.5 percent.

Other government data showed on Friday that Japanese overall household spending rose 0.6 percent in October from a year earlier in price-adjusted real terms, as expected.