Tokyo CPI eyed ahead of BoJ December hike decision

An unexpected result in the data would flow most directly through the yen. A reading stronger than forecast would probably support the yen and nudge JGB yields up, as traders increase their wagers on a December rate rise. A weaker figure would tend to put pressure on the yen and might lift Japanese stocks, especially those of exporters. Since the BoJ's decision comes just hours later, the initial market reaction to the data could be fleeting, or it could be magnified, hinging on the central bank's message.

The data feeds directly into the BoJ's decision.

Tokyo's inflation is forecast to dip only a little, staying well above the central bank's objective and ensuring a December rate increase remains a very real prospect.

Key data in brief:

• Tokyo CPI release for October set for 23:30 GMT (8:30 Tokyo, 10:30 Sydney)
• Core CPI (ex-fresh food) seen at 2.6% y/y, down from 2.7% in September
• Headline rate was 2.7% previously; CPI stripping out food and energy was 3%
• BoJ widely predicted to keep its rate at 1.25% later, December still in play
• Japanese employment data arrives simultaneously; BoJ Outlook Report follows at 03:00 GMT

The Tokyo CPI figures for October arrive only a short while before the Bank of Japan delivers its policy verdict on Friday. The data offers traders one final check on inflation as the BoJ members consider when to deliver their next increase.

The core inflation gauge for Tokyo, which strips out the volatile fresh food component, is pegged at 2.6% annually, a small step down from the 2.7% seen in September. Even at this lower rate, the indicator would still exceed the BoJ's 2% goal. The figures are scheduled for 23:30 GMT, corresponding to 8:30 am Tokyo time.

Two additional indicators will aid markets in assessing the spread of price pressures. The headline Tokyo rate came in at 2.7% in September, and the measure excluding both food and energy was 3%. The latter index is widely seen as a gauge of true underlying inflation, as it discards the elements most sensitive to commodity and weather fluctuations. A result staying close to 3% would imply that domestic price pressures are holding up, even if the core figure edges down somewhat.

The Tokyo data has an impact that goes well beyond the city. It emerges several weeks before the national readings and is commonly relied upon as an early signal for the country's inflation trajectory. This makes it particularly influential when it coincides with a BoJ policy day.

The Bank of Japan is broadly assumed to retain its policy rate at 1.25% later on Friday, with the market's focus on any sign of action at the December gathering. A core CPI reading at or exceeding the previous 2.7% would probably back the argument for a tightening move before the year is out. A more pronounced fall than expected might strengthen the belief that the central bank will postpone any move.

• Daiwa expects the BoJ to hold at its meeting, with a 2% inflation print potentially opening the door to a December hike.
• MUFG also sees the bank holding, but warns a 2% inflation call with two dissenting votes presents the key yen risk.
• BoJ to hold at 1.25% while Ueda signals additional rate increases toward neutral.
• BoJ expected to lift rates to 1.50% in December as 69% of economists forecast a Q4 move.
• BoJ may upgrade its inflation projection and hold the line at next week's meeting, reports suggest.

Labour market statistics for September are published concurrently, with the unemployment rate predicted to stay unchanged at 2.5%. The BoJ's quarterly Outlook Report, arriving at 03:00 GMT, will then reveal how the central bank's own inflation predictions align with the fresh numbers.