Kazuo Ueda, the Bank of Japan governor, said in September that underlying inflation was 'quite close to 2%'. The central bank may now signal this month that it believes the measure has roughly reached its target.
Underlying inflation is the broader, demand-driven trend in prices after temporary factors are stripped out. Tokyo consumer inflation figures and the Bank of Japan’s quarterly ‘tankan’ survey of businesses are likely to strengthen the bank’s confidence in that assessment.
The latest headline figure offers a narrower reading. Official data published on Friday ahead of the BOJ announcement showed core inflation at 1.7% in August, down from 1.8% the previous month, though still close to the bank’s 2% target.
The distinction matters because the BOJ has already moved a long way from the policy it adopted to fight deflation. In September, it raised its main interest rate from 1% to 1.25%.
The new rate was last seen in 1995 and is a 31-year high. It followed six rate increases over the last two and a half years, after the rate had stood at minus 0.1% in 2024.
For around three decades, Japan had lived with very low inflation or deflation. The BOJ began an ultra-loose monetary policy in 2013, seeking to stimulate the economy and lift prices in a low-inflation environment.
A weaker yen and higher global energy prices then pushed Japanese inflation above the BOJ’s 2% target. Prospects of rising salaries also helped persuade the bank to begin unwinding its ultra-loose stance, lifting interest rates in March 2024.
Currency pressures have remained part of the backdrop. In August, Tokyo and Washington jointly intervened to halt the yen’s fall after it reached a fresh 40-year low, the first coordinated intervention of this kind since 2011.
The prospect of further tightening has also attracted attention from abroad. US Treasury Secretary Scott Bessent urged Ueda to 'do the right thing' on interest-rate increases.
A declaration that underlying inflation is around target would signal the BOJ’s readiness to raise rates again in the coming months. Some policymakers, however, want more data and time to judge how earlier increases have affected domestic financial conditions before backing another move this month. Market expectations point to a possible increase in December.
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