Japan’s Inflation Gauge Jumps to 3.2% in September, Fastest Pace Since 2023

Key Facts

The Bank of Japan’s core inflation gauge rose to 3.2% year on year in September, from 2.6% in August, marking its largest annual increase since October 2023, according to Reuters. The measure strips out exceptional institutional factors, including education and energy subsidies, and therefore differs from the government’s core consumer price index. The government index excludes volatile fresh food but does not remove the effects of subsidies and other government measures. Reuters quoted economist Kenichiro Arahara as saying companies are passing prices on to their corporate customers, reflecting the strong outcome of this year’s wage negotiations. The reading puts price pressures and their transmission between companies at the center of debate ahead of the central bank’s upcoming meeting.

Another gauge of price pressures in the services sector rose 3.7% year on year in September, compared with a revised 3.5% increase in August, according to Reuters. The Bank of Japan monitors the services producer price index to measure how far companies are passing labor costs on to services prices. The consecutive monthly increase reinforces the picture of wage pressures feeding through to prices, alongside Arahara’s remarks about companies passing prices on in transactions with other companies. This comes as the adjusted core inflation gauge rose at its fastest annual pace since October 2023. These readings give the bank additional indicators for assessing how entrenched price pressures are before it updates its forecasts.

In its forecasts published in July, the Bank of Japan said consumer price inflation could clearly exceed 2% from the second half of fiscal 2026, influenced by higher oil prices, AI-related demand and a weaker yen. The bank expected inflation to move toward 2% during fiscal 2028. It estimated real GDP growth at 0.6% in fiscal 2026, then 0.8% in each of fiscal 2027 and fiscal 2028. Its forecasts for consumer price inflation excluding fresh food were 2.5% for fiscal 2026, 2.4% for fiscal 2027 and 2.0% for fiscal 2028. The paths for prices and activity provide the backdrop for the bank’s coming review of its economic estimates.

Preliminary October activity data point to continued expansion, though at different rates across the two sectors. The composite output index stood at 52.3 for a second consecutive month, a reading consistent with quarterly GDP growth of about 0.5%, according to S&P Global. Services activity accelerated to a pace close to its year-to-date average. By contrast, manufacturing output growth slowed to its weakest pace in seven months. Even so, services and manufacturing both continued to expand for a fifth consecutive month. This divergence comes as the bank weighs continued economic activity against price pressures.

The interest rate has stood at 1.25% since the Bank of Japan’s September 18 decision, after being 1.0% in the previous decision issued on June 16, according to decision data published on the L7 platform. The bank meets on October 29 and 30 to review monetary policy and its economic and price outlook. The “Bank’s View” on the Outlook Report is scheduled for publication on October 30, with the full report to be released on the following business day. The bank will then publish its Summary of Opinions on November 10. These dates set the next official milestones for the bank’s review of the path for prices and activity.