Bank of Japan’s Inflation Gauge Rises to 3.2% in September, Above 2% Target
Key Facts
The Bank of Japan’s measure of underlying inflation trends rose to 3.2% in September from 2.6% in August, exceeding the bank’s 2% target, according to a summary published by Bloomberg. The reading puts the gauge above target as the bank prepares to review its economic and price outlook. The bank’s next meeting is scheduled for October 29 and 30, with its outlook report due on the second day. In its July forecasts, the bank said inflation could clearly exceed 2% in the second half of fiscal 2026 before moving toward that level through fiscal 2028. The bank also linked its outlook to factors including oil prices, AI-related demand and the weak yen. The October meeting is set to include the latest monetary policy decision and an updated report on the path of activity and prices.
The gauge reading is significant in the context of the Bank of Japan’s warning about the risk that underlying inflation could overshoot its price stability target. In its July forecasts, the bank said there was a risk that core consumer price inflation would move higher to a level exceeding the 2% target. It pointed to AI-related demand, the weak yen and rising oil prices as factors driving inflation. In the same report, the bank forecast real GDP growth of 0.6% in fiscal 2026, followed by 0.8% in each of fiscal 2027 and 2028. The projections combine continued economic growth with the possibility that price pressures will remain above target. The October report gives the bank an opportunity to review these estimates in light of the latest indicators.
On activity, Japan’s composite output index stood at 52.3 in October for the second consecutive month, consistent, according to S&P Global, with GDP growth of about 0.5% quarter on quarter. Services activity growth accelerated to a pace close to its average since the start of the year. By contrast, manufacturing output growth slowed to its weakest pace since March, despite continuing to expand for a tenth consecutive month. The composite reading points to continued activity growth, but the two sectors did not perform uniformly during the month. This divergence comes as the Bank of Japan assesses the path of the economy and inflation ahead of its meeting. The S&P report also showed producer price inflation falling to a joint nine-month low.
Input cost inflation, meanwhile, rose in October, driven by higher energy costs and the weak yen, according to S&P Global. This coincided with producer price inflation slowing to a joint nine-month low, putting input cost pressures and changes in producer prices on different trajectories. The report did not provide a rate for the increase in input costs, but attributed the rise to energy and the currency. These indicators highlight pressures on companies from the cost of what they buy, at a time when the pace of producer price increases has eased. This follows the Bank of Japan’s rate increase to 1.25% from 1.0% on September 18, according to the Associated Press. The current policy rate puts the latest inflation reading in the context of the tightening cycle investors are watching.
Sources cited by Reuters expect the Bank of Japan to leave interest rates unchanged at the meeting ending October 30, with the possibility of raising its inflation forecast for the next fiscal year. The sources said holding rates steady could leave room for another increase in December. In a Reuters poll, a majority of economists expected a rate rise to 1.50% in December, following increases in June and September. More analysts also expected at least two further increases, taking rates to 2.0% by the middle of the following year. These are estimates from sources and analysts, not an announced bank decision; the official decision will be issued at the conclusion of the meeting. A summary of opinions from the October meeting will be published on November 10, after the outlook report is issued on October 30.
In separate remarks, Bank of Japan board member Junko Koda said the bank should not be overly cautious about raising rates given the upside risks to inflation. She described the neutral interest rate as well above 1%, referring to her estimate of the level that neither stimulates nor restrains economic activity. Her comments add to debate over how close the current interest rate is to a neutral level, without representing a collective board decision. Markets are awaiting the outlook report scheduled for October 30, when the meeting concludes. The bank will then publish its summary of opinions on November 10, the next date on its calendar for meeting materials.