Japan Inflation Reaches 2.1% Ahead of Central Bank Meeting, With Rates Expected to Hold at 1.25%

Key Facts

Japan’s core inflation accelerated to 2.1% year on year in September, from 1.7% in August, as the Bank of Japan prepares for its October 29-30 meeting, with expectations pointing to the policy rate holding at 1.25%. September’s reading matched the market consensus, according to data cited by Reuters, but was higher than the previous month. The bank is scheduled to announce its decision and its outlook for the economy and prices on October 30. The meeting follows a rate increase in September to 1.25% from 1.0%, its highest level in 31 years, according to the Associated Press. Reuters said the bank is likely to avoid consecutive increases, allowing more time to assess the impact of previous hikes on lending.

Another inflation measure, which excludes fresh food and fuel, rose to 2.4% year on year in September from 1.9% in August, according to Reuters. That puts both inflation readings near or above the Bank of Japan’s 2% target, though the measures include different components. Reuters attributed price pressures to elevated fuel costs linked to the continuing conflict in the Middle East and import prices pushed higher by the weak yen. It also said strong demand related to artificial intelligence contributed to keeping prices elevated. These factors, it added, limited the impact of government fuel support. Higher energy and import costs come as the bank monitors whether inflation will stabilize around its target.

On the activity front, Japan’s composite output index stood at 52.3 points in October for the second consecutive month, according to S&P Global. The firm said the reading points to gross domestic product growth of about 0.5% quarter on quarter in the fourth quarter. The activity reading, together with September inflation, reinforces the picture of an economy continuing to grow alongside persistent price pressures. Bank of Japan Governor Kazuo Ueda said on September 18 that the economy was continuing a gradual recovery and that inflation was close to the bank’s 2% target. Deliberations on interest rates are based on this balance between a gradual recovery and rising prices. Reuters also noted that higher wages and inflation expectations becoming entrenched near 2% are prompting the bank to focus on stabilizing inflation around its target.

Views among board members reveal differences over the timing of the next move. The summary of opinions from the September meeting said core inflation was approaching 2%, but was not accelerating at a pace that required the bank to act hastily or risk falling behind the curve. By contrast, one board member said the bank should act in a timely manner without excessive caution when deciding on a rate increase, while taking account of the risk of higher prices. Reuters also reported that some policymakers called in the meeting summary for a faster pace of rate increases. The divergence means the October meeting will be important in determining how the bank balances avoiding a rushed move with responding to persistent price pressures. Reuters said the bank may signal that core inflation has nearly reached its 2% target, while focusing on stabilizing it around that level by gradually moving rates toward neutral levels.

In a Reuters poll conducted from October 13 to 19, 54 of 78 economists expected the bank to raise rates to 1.50% during the fourth quarter. Among respondents who specified a month for the increase, about 80% chose December as the likely timing. Reuters expected an October hold to leave room for a later increase, while economists in its poll expected hikes to continue at a quarterly pace. These forecasts reflect economists’ views on the rate path; the actual decision will depend on the bank’s assessment of the data and its outlook. The current policy rate of 1.25% falls within an estimated neutral rate range of 1.1% to 2.5% set by bank staff, according to Reuters. That makes the extent of any further tightening a focus in the coming period.

The Bank of Japan will publish its policy statement and outlook for the economy and prices on October 30, with the full text of its Outlook Report due on November 2. The bank has also set November 10 for publication of the summary of opinions from its October 29-30 meeting. These releases provide the next milestones for tracking the bank’s assessment of the path for inflation and activity. In foreign exchange markets, EL7 data showed the dollar closing at 157.47 yen on October 26. The level comes as markets focus on whether the bank will hold rates in October and what its outlook will say about inflation and monetary policy.