Japan’s core inflation is now around 2%, supported by broadly strong economic indicators, tight labor market conditions and a supply-demand balance that has largely returned to normal, Bank of Japan Board Member Junko Koeda said Thursday.
Key quotes
Japan’s recent economic indicators have been generally strong.
Prices in Japan in general have been relatively strong recently.
Economic growth in Japan is expected to be temporarily modest and then accelerate.
As for prices, the effects of rising food prices, such as rice prices, are expected to diminish during the first half of the next fiscal year.
As for risks to prices, Bock takes into account the behavior of firms in setting wages and prices, developments in foreign exchange rates and import prices.
As for risks to prices, the Bank of Japan (not the central bank) takes into account the behavior of companies in setting wages and prices, and developments in foreign exchange rates and import prices.
The overview of the latest member forecasts as of October suggests that risks to economic activity are balanced for FY2025 and tilted to the downside for FY2026.
Price risks are balanced.
If the level of rice prices significantly increases consumers’ perceptions of higher prices, this would create an upward risk to prices through higher inflation expectations.
Market reaction
At the time of writing, USD/JPY was up 0.20% on the day at 157.30.
Bank of Japan Frequently Asked Questions
The Bank of Japan (BoJ) is Japan’s central bank, which sets the country’s monetary policy. Its mission is to issue banknotes and implement currency and monetary controls to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked on an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflation environment. The bank’s policy relies on quantitative and qualitative easing (QQE), or printing banknotes to purchase assets such as government bonds or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and eased its policy by first offering negative interest rates and then directly controlling the yields of its 10-year government bonds. In March 2024, the Bank of Japan raised interest rates, effectively reversing its ultra-loose monetary policy stance.
The massive incentives offered by the bank caused the value of the Japanese yen to decline against major currencies. This process was exacerbated in 2022 and 2023 by the growing policy divergence between the Bank of Japan and other major central banks, which chose to increase interest rates sharply to combat decades-long high levels of inflation. The Bank of Japan’s policy led to a widening of the spread with other currencies, which led to a decline in the value of the Japanese yen. This trend was partially reversed in 2024, when the Bank of Japan decided to abandon its overly accommodating policy stance.
The weakness of the Japanese yen and rising global energy prices led to an increase in Japanese inflation, which exceeded the Bank of Japan’s target of 2%. The prospect of higher salaries in the country – a key element fueling inflation – also contributed to the move.
