The Bank of Japan (BoJ) announced on Friday that inflation has reached its 2% target, more than 13 years after it set that goal. For decades, Japan struggled with deflation, a period when prices keep falling and slow down the economy. The 2% target was introduced in 2013, alongside a large stimulus programme meant to push prices up.
Inflation has briefly passed 2% before, in the early 2020s. This is the first time the central bank has said the price trend is truly in line with its goal and is expected to stay there.
Even so, the BoJ chose not to raise interest rates this time. It kept its key rate at 1.25%, with eight of nine board members voting in favour. The decision follows similar choices by the US Federal Reserve and the European Central Bank earlier this week.
The Japanese government is more cautious. Economy Minister Minoru Kiuchi said last week that Japan is not yet out of deflation. Prime Minister Sanae Takaichi is seen as favouring economic stimulus over tackling inflation, which has raised concerns that the government could be pressuring the BoJ to keep rates low.
Rate rises may not be far off, however. Japanese officials are expected to raise rates in December as price pressures grow. Core inflation, which excludes fresh food, rose to 2.1% in September from 1.7% in August. The BoJ expects it to climb clearly above 2%, for several reasons:
Higher oil prices, which push up energy and goods prices
Rising semiconductor prices, driven by global demand linked to AI
A weaker yen, which makes imports more expensive
Analysts agree that tightening is likely. Marcel Thieliant of Capital Economics expects the policy rate to reach 2% by the middle of next year, with risks leaning towards further increases after that.
In short, Japan has reached a milestone it has chased for over a decade, but the next question is how quickly the central bank will move to keep inflation in check.
At DMX Associates, we are monitoring developments in global monetary policy and the Japanese economy. Stay up to date via our website and LinkedIn page.
