Japan’s headline inflation rate eased to 2.3% in October, marking its lowest level since January and a decline from 2.5% in September. The core inflation rate, which excludes volatile fresh food prices, also softened slightly to 2.3%, compared to September’s 2.4%. Despite this moderation, the figure exceeded economists’ expectations of 2.2%, according to a Reuters poll.
A separate inflation metric, the “core-core” inflation rate, which strips out both fresh food and energy prices, rose to 2.3%, up from 2.1% in September. This measure, closely monitored by the Bank of Japan (BOJ), suggests persistent underlying price pressures despite the overall cooling in headline inflation.
The BOJ has long targeted a “virtuous cycle between wages and prices” to achieve sustained inflation. A weak inflation reading typically supports maintaining an accommodative monetary policy. However, the increase in core-core inflation and statements from BOJ officials suggest that a policy shift may still be on the horizon.
As of November 22, 55% of economists polled by Reuters anticipated a 25-basis-point hike in the BOJ’s December meeting, potentially raising the benchmark policy rate to 0.5%. The bank’s most recent summary of opinions indicated that, if inflation and economic trends align with expectations, the policy rate could reach 1% by the second half of the 2025 fiscal year.
BOJ Governor Kazuo Ueda recently emphasized that the economy is moving toward sustained, wage-driven inflation, cautioning against excessively low borrowing costs. This stance aligns with the BOJ’s gradual tightening strategy as it seeks to stabilize the yen and manage inflationary pressures.
Analysts like Lorraine Tan, Morningstar’s director of equity research for Asia, noted that the rise in the core-core inflation rate supports the expectation of a gradual escalation in BOJ interest rates. Tan added that monetary policy adjustments would also help stabilize the yen, which had weakened against the U.S. dollar in November, hitting a four-month intraday high of 156.74 on November 15. The currency has since recovered slightly, trading at 154.28 on Friday.
Tan warned that a widening gap between the yen and the U.S. dollar could introduce additional inflationary pressures, as many of Japan’s input costs are priced in dollars. The BOJ’s cautious approach to monetary policy aims to balance inflation control, economic growth, and currency stability as Japan navigates its evolving economic landscape.
