Core inflation cools but pressures for hike persist
The Bank of Japan (BOJ) kept its benchmark policy rate steady at 0.5% on Friday, in line with expectations from economists polled by Reuters. The decision came as Japan’s core inflation dropped to 2.7% in August, the lowest level since November 2024 and marking the third consecutive monthly decline.
Headline inflation also cooled to 2.7% from July’s 3.1%, while the closely watched “core-core” inflation — which excludes fresh food and energy — eased to 3.3%. These figures indicate a broad-based softening in price pressures, though inflation remains above the BOJ’s 2% target.
Rice prices ease, but concerns linger
Rice inflation, which has been a major contributor to the country’s cost-of-living crisis, eased significantly to 69.7% in August from a staggering 90.7% in July. Despite the drop, prices remain elevated, with food inflation continuing to weigh on household spending.
The BOJ acknowledged that inflation expectations have “moderately” increased due to food price pressures, but it expects the impact from rising food costs to gradually diminish.
Diverging views within the BOJ
The rate decision was not unanimous, with two members of the nine-member board voting to raise the rate to 0.75%. The BOJ’s majority, however, maintained a cautious stance amid ongoing global uncertainty and softening domestic inflation.
“The decision underscores a preference for stability over premature tightening,” said Hiroaki Amemiya, Investment Director at Capital Group. He highlighted the BOJ’s reflationary approach in contrast to the U.S. and Europe, which are beginning to cut rates.
Calls for action grow louder
Despite the BOJ’s conservative approach, voices calling for a rate hike are intensifying. Senior Liberal Democratic Party member Taro Kono recently warned that delaying hikes could worsen inflation and raise the cost of imports.
Yet, others like Junyu Tan of Coface argue that elevated inflation is largely the result of temporary factors such as supply chain disruptions and a weak yen. Tan pointed out that service sector price growth remains too weak to justify a decisive policy shift.
For long-term investors, Amemiya sees Japan’s macro backdrop — including governance reforms, wage increases, and capital investment — as a strong foundation for growth, especially in manufacturing, industrials, and auto sectors benefiting from global supply chain realignment.
