The annual rate of change in Tokyo’s core inflation rate picked up in September, to its highest level in the past decade. The sharp rise reflects a growing trend of price pressures across Japan and reinforces the case for more interest rate hikes from the nation’s central bank.

These recent data are a key forward-looking signal of the overall economy. The data will be carefully studied by the Bank of Japan (BOJ) as it considers raising interest rates at the next policy meeting on October 29-30, as a key to its inflation forecast.

The financial markets have lowered their expectations of a rate hike this month, but many experts believe the BOJ will hike its policy rate in December. This would be to stave off the threat of an inflation “overshoot” driven by a devaluation of the yen and oil prices that are rising because of Middle East wars.

The capital region’s core consumer price index, which excludes volatile fresh food but includes fuel, increased 2.7% from a year ago in September, according to data released on Friday. The rate was higher than the market median at 2.4% and the 1.8% achieved in August, and the first time since January that the measure was above the central bank’s 2% target.

A broader measure of inflation, excluding both fresh food and fuel, jumped to 3.0% in September. The central bank has a close eye on this indicator as a reliable measure of underlying inflation, and it marked its biggest year-on-year increase since August 2025.

The main reason was the end of government subsidies for children and various utilities. High rates of inflation have also been in the prices of an array of commodities such as foodstuffs and electronics, including computer equipment, since most parts are inclined to go up partly because of increases in raw materials prices as well as chip prices tracked by institutions such as the Ministry of Finance.

At the same time, inflation in the services sector has also increased from 1.4% in August to 2.3% in September. This indicates that companies have become more inclined to pass on the high costs of labor due to tight labor market conditions.

The central bank last month hiked its key rate to a 31-year high, marking a shift in strategy to contain inflation, which is being driven by demand. Analysts think hawkish policymakers might feel bolder to continue raising rates before the end of the year, as a second wave of energy-related shocks looms as a risk to keeping inflation low.