Key Points
- Japan’s central bank says underlying inflation has reached its 2 per cent target.
- Interest rates remain unchanged after an 8-1 policy vote.
- Rising energy costs, a weak yen and wage pressures keep further monetary tightening in prospect.
ISLAMABAD: Japan’s central bank has reached a major milestone in its long campaign against deflation, saying underlying inflation hit its 2 per cent target for the first time in 13 years, while keeping interest rates unchanged on Friday.
The Bank of Japan (BOJ), in its quarterly economic outlook, said underlying inflation was now at a level generally consistent with its price stability objective and was expected to remain around that level.
The assessment marks a turning point for an economy that struggled with falling prices and, for decades, weak domestic demand.
The central bank introduced its 2 per cent inflation target in January 2013 under then-governor Haruhiko Kuroda, promising to achieve it within two years through aggressive monetary easing.
However, the goal took more than a decade to reach.
Interest rates held steady
The BOJ kept its short-term policy interest rate at 1.25 per cent, following a two-day monetary policy meeting.
The decision was approved by eight of its nine policy board members, with board member Hajime Takata dissenting and proposing an increase to 1.5 per cent.
The decision allows the central bank more time to assess the economic impact of its September rate increase, which took borrowing costs to their highest level since 1995.
However, the latest assessment indicates that the BOJ is shifting its attention from generating inflation to ensuring that price increases remain stable around its target.
Governor Kazuo Ueda is expected to provide further guidance on the bank’s policy outlook at a news conference following the meeting.
Inflation pressures persist
Japan’s inflation has been supported by higher energy and import costs, a weaker yen and rising wages. The prolonged Middle East conflict has also contributed to uncertainty over energy supplies and prices.
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Government data released on Friday showed Tokyo’s core consumer price index, which excludes fresh food but includes energy, rose 2.6 per cent year on year in October, following a 2.7 per cent increase in September.
A separate measure excluding both fresh food and energy also increased 2.6 per cent, highlighting persistent price pressures in the Japanese capital.
The BOJ revised upwards its core inflation forecast for the fiscal year ending March 2028 to 2.6 per cent from 2.4 per cent, previously, reflecting concerns that price pressures could remain elevated.
The bank has warned that inflation could exceed its target if rising costs and inflation expectations become entrenched.
Further rate increases possible
The latest policy statement indicates that the BOJ remains prepared to raise interest rates further if economic and price developments align with its projections.
Financial markets are increasingly looking to December for another possible rate increase, though the timing will depend on incoming economic data and the impact of previous policy adjustments.
Japan’s shift towards sustained inflation marks a significant change after years of ultra-low interest rates and extensive monetary stimulus.
The challenge for policymakers is now to maintain price stability while ensuring that higher borrowing costs do not undermine economic growth and household consumption.
