Japan’s consumer inflation ticked higher during November, soaring to an over three-year high, following the government’s decision to hike sales tax in October. Japan’s core CPI climbed 0.5% higher YoY in November, coming in line with economists’ forecast and higher than October’s reading of +0.4%.

Core core CPI, which excludes the impact of fresh food and energy costs, rose 0.8% YoY in November. This was the fastest pace of growth seen in this figure since April 2016, driven by the hike in sales tax from 8% to 10% which was implemented on October 1, 2019.

However, markets remain cautious about the state of the Japanese economy despite the rise in inflation data. Although Q3 GDP came in at 1.8%, there are expectations that the economy could witness a contraction in Q4 on the back of the sales tax increase, even as trade tensions weigh on exports and factory activity.

In October, factory output witnessed the steepest decline seen in two years while business sentiment among manufacturers dove to the lowest levels in seven years in Q4. In its latest meeting, the BOJ chose to keep its monetary policy steady, expressing hopes for strong domestic demand to support economic growth in the face of a slowdown in exports.