Japan’s inflation remained above the Bank of Japan’s (BoJ) 2% target for the 42nd consecutive month, coming in at 2.9% in September. The latest figures provide the backdrop for Prime Minister Sanae Takaichi’s first parliamentary address on Friday, where she is expected to outline the new government’s key priorities. According to Commerzbank FX analyst Volkmar Baur, the focus will likely be on the rising cost of living, which has outpaced wage growth and led to a sustained decline in real incomes across the country.
BoJ expected to move cautiously on rate hikes
Baur notes that while some short-term relief measures—such as temporary tax cuts and a suspension of the gasoline levy—may be announced, substantial structural reforms appear unlikely. Persistent challenges in the agricultural sector, particularly those contributing to soaring rice prices, remain largely unaddressed. Food costs have been the main driver of inflation in recent months.
Excluding food prices, Japan’s core inflation slowed to 1.3% in September, well below the BoJ’s target and marking a continued trend of sub-2% inflation since May 2024. As a result, Commerzbank expects the BoJ to hold rates steady at its upcoming meeting but sees a possibility of a modest rate hike in December, depending on how effectively Prime Minister Takaichi’s policies are implemented.
Gradual path toward stability
“For now, we assume the government’s plans will neither address the structural causes of cost inflation in the food sector nor present measures that could meaningfully boost wages,” Baur said. “This suggests that demand-driven inflation will remain weak, while cost-side pressures persist.”
Commerzbank forecasts that Japan’s headline inflation will likely ease below 2% in the coming months but is unlikely to return to zero. This environment, the bank says, should allow the BoJ to raise interest rates only gradually, maintaining a very slow tightening pace.
While this cautious policy stance may not trigger a significant appreciation of the Japanese Yen (JPY) against the US Dollar (USD), Commerzbank believes it should be sufficient to stabilize the currency in the near term.
