Japan’s inflation remained above the Bank of Japan’s 2% target in September, coming in at 2.9% year-on-year for the 42nd consecutive month. Against this backdrop, new Prime Minister Sanae Takaichi is set to deliver her first address to parliament today, outlining the priorities of her administration.
According to Commerzbank FX analyst Volkmar Baur, one of the key issues will be the rising cost of living, which has outpaced wage growth and led to a decline in real incomes.
BoJ to Maintain Gradual Tightening Pace
Commerzbank notes that, apart from limited fiscal measures such as targeted tax cuts and the temporary suspension of the gasoline tax, no major structural reforms are expected. Challenges in the agricultural sector, which have driven up rice and food prices, are unlikely to be addressed.
Excluding food prices, core inflation stood at just 1.3% in September, remaining below 2% since May 2024. As a result, Baur expects the Bank of Japan (BoJ) to keep rates unchanged at its upcoming meeting, though a rate hike in December remains possible—depending on the government’s policy details and implementation timeline.
Outlook for Inflation and the Yen
Commerzbank anticipates that Japan’s structural issues will continue to generate mild cost pressures, while demand-driven inflation will remain weak due to stagnant wages. Consequently, headline inflation is likely to dip below 2% in the coming months but stay above zero, preventing deflation.
This backdrop should allow the BoJ to continue raising rates gradually, though the pace will be too slow to trigger a sharp yen appreciation. Instead, analysts expect the JPY to stabilize against the U.S. dollar.
