BOJ holds rates as Japan core inflation dips to lowest since November 2024

The Bank of Japan has decided to maintain its policy rate at 0.5% in line with expectations from economists. This decision comes as Japan’s core inflation rate dropped to 2.7% in August, the lowest since November 2024, marking a third consecutive month of decline. The core inflation figure, excluding fresh food prices, was in line with economist predictions.

Headline inflation in Japan also fell to 2.7% in August from 3.1% in July, reaching a new low since November 2024. The “core-core” inflation rate, which excludes both fresh food and energy prices and is closely monitored by the Bank of Japan, decreased to 3.3% from 3.4% in July. Despite rice inflation softening to 69.7% from 90.7% in July, it remains at historically high levels, contributing to a cost-of-living crisis in the country.

The Bank of Japan noted that inflation expectations have moderately increased, with core inflation expected to be in the range of 2.5% to 3% due to rising food prices. However, the effects of food cost increases, particularly in rice prices, are expected to diminish over time.

The decision to keep rates unchanged was made by a 7-2 majority vote, with some members advocating for a hike to 0.75%. The Bank of Japan’s cautious approach reflects its prioritization of stability amid slowing inflation and global uncertainties. This strategy supports a reflationary cycle in Japan’s macroeconomic environment, distinguishing it from the U.S. and Europe, where rates are being cut as inflation eases.

While there are calls for the Bank of Japan to raise rates as headline inflation has surpassed the 2% target for over three years, some experts believe that the high inflation is influenced by supply constraints and external factors like a weak yen and commodity price strength. Key domestic demand indicators, such as service price growth, have not met targets, leading the Bank of Japan to maintain its current stance.

Overall, the outlook for Japan remains positive, with factors such as corporate governance reforms, rising wages, and increased capital expenditure driving domestic consumption and productivity. Long-term investors are encouraged to reassess opportunities in Japan, particularly in sectors like industrials, manufacturing, and automobiles, which are well-positioned to navigate trade challenges and benefit from global supply chain shifts.