Japan’s inflation eased to 2.3% in October, marking its lowest level since January and a slight decline from September’s 2.5%.
The core inflation rate, which excludes fresh food, also stood at 2.3%, down from 2.4% in the previous month but slightly above the 2.2% forecasted by economists polled by Reuters.
Despite the drop, the Bank of Japan (BOJ) faces nuanced challenges. The “core-core” inflation rate, which strips out prices for both fresh food and energy, rose to 2.3% from 2.1% in September.
This metric, closely monitored by the BOJ, signals that inflationary pressures persist, aligning with the bank’s vision of a “virtuous cycle between wages and prices.”
Economists remain divided on the BOJ’s next steps.
As of November 22, 55% of those polled by Reuters expected the BOJ to raise rates by 25 basis points at its December meeting, which would bring the benchmark policy rate to 0.5%.
The BOJ’s latest outlook suggests rates could reach 1% by the second half of fiscal 2025 if economic trends, including inflation and wages, unfold as anticipated.
BOJ Governor Kazuo Ueda expressed optimism about the economy’s shift toward sustained wage-driven inflation, though he warned of risks associated with maintaining ultra-low borrowing costs.
Experts, including Morningstar’s Lorraine Tan, have echoed similar sentiments, suggesting that gradual interest rate hikes could help stabilize Japan’s currency while preserving the momentum of its recovery.
Tan emphasized that monetary policy adjustments could serve to maintain the yen’s stability—a critical factor for Japan’s economic and business outlook.
Japan’s yen faced volatility in November, sliding to a four-month low of 156.74 against the dollar on November 15 before rebounding slightly to 154.28 by the end of the week.
Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corporation, noted that while inflation has “calmed down,” the latest data aligns with BOJ forecasts, supporting the case for a rate hike.
As the BOJ prepares for its December meeting, the balancing act continues.
Japan’s policymakers must carefully navigate the interplay between inflation, wages, and monetary policy to ensure sustainable growth while maintaining economic and currency stability.
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