The Bank of Japan retained its policy rate at 0.5 percent on Friday. The move to keep it since the core inflation rate in Japan dropped to its lowest point in its history in November 2024, posting a core inflation rate of 2.7 percent in August, and it is the third month of consecutive decreases.
The fundamental inflation rate in Japan, the one that factors out prices of fresh food, agreed with the 2.7 percent forecasted by the economists polled by Reuters.
The country also recorded a low level of headline inflation that decreased to 2.7 percent, compared to 3.1 percent in July, which is the lowest point in the country since November 2024.
However, the inflation rate “core-core,” which removes the prices of not only fresh food but also of energy and is extremely closely watched by the Bank of Japan, stood at 3.3 percent, as compared to 3.4 percent in July.
Rice inflation, which has helped trigger a cost-of-living crisis in the nation, fell markedly to 69.7 percent compared to July’s 90.7 percent in history.
In a statement prepared by the BOJ, it is reported that inflation expectations have moderately increased, and with core inflation within the range of 2.5 percent – 3 percent, as a result of the impact of the increase in food prices.
The Central Bank states that the impact of increasing food prices, mainly in rice prices will likely decline.
Escalating tensions of hike
As per the BOJ, the decision to maintain the rates at the same level was voted 7-2 majority, with the dissenting parties proposing an increase to 0.75 percent.
On Friday, Hiroaki Amemiya, Investment Director at Capital Group, adds that the decision of the BOJ to maintain rates reflects its “underscores its cautious stance amid slowing inflation and global uncertainty – prioritizing stability over premature tightening.”
Hiroaki Amemiya stated that it’s against the trend, is supportive of a reflationary cycle based on the macroeconomic conditions in Japan, contrary to the U.S. and Europe, which are reducing rates as inflation reduces.
He further said that he was optimistic about the future of Japan and said that the interest rate gaps between Japan and other countries would narrow, strengthening the purchasing power of the Japanese and domestic demand.
The domestic consumption and productivity are being driven by other factors, including corporate governance reforms, an increase in wages, and capital expenditure.
“For long-term investors, this is a prudent time to reassess opportunities in Japan. We continue to see value in sectors such as Japan’s industrials, manufacturing and automobile sectors – industries well-positioned to navigate trade headwinds and benefit from global supply chain shifts,” he said.
However, there are increasing demands that the BOJ increase rates because Japanese headline inflation has remained above the bank’s target of 2 percent for more than three years.
The analysts of HSBC had indicated on September 12 that the high inflationary pressure in Japan is already being fueled by high rice prices, and this is now triggering louder demands to raise the rates even further.
On September 9, Senior Liberal Democratic Party Member Taro Kon states, “If the Bank of Japan delays a rate increase, I think it would mean inflation will continue and everything we import would be higher.”
The Economist for North Asia at credit risk management Coface presented his opinion pertaining to high headline inflation, adding “largely distorted by supply constraints and influenced by exogenous factors such as a weak yen and commodity price strength.”
He said that the domestic demand indicators, especially service price growth, are also lower than the target and have failed to increase rapidly enough to persuade the BOJ to change its mind decisively.
