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

The Bank of Japan kept its policy rate steady at 0.5% on Friday, in line with the forecast from a Reuters poll of economists.

The decision to stand pat comes as Japan’s core inflation rate fell to its lowest since November 2024, coming in at 2.7% for August and marking a third straight month of decline.

Japan’s core inflation figure — which strips out prices of fresh food — was in line with the 2.7% expected by economists polled by Reuters.

Headline inflation in the country also dropped to 2.7%, from 3.1% in July, marking a fresh low since November 2024.

The so-called “core-core” inflation rate, which strips out prices of both fresh food and energy and is closely monitored by the Bank of Japan, was at 3.3%, down from 3.4% in July.

Rice inflation, which has contributed to a cost-of-living crisis in the country,  softened significantly to 69.7%, down from July’s 90.7%, but remains at historic highs.

The BOJ noted in its statement that inflation expectations have risen “moderately”, with the core inflation in the range of 2.5%-3% due to the effects of food price rises.

However, the central bank said that the effects of rising food costs, especially in rice prices, are expected to wane.

The BOJ also revealed the decision to keep rates unchanged was by a 7-2 majority vote, with the dissenters counter-proposing a hike to 0.75%.

The BOJ’s move to hold rates “underscores its cautious stance amid slowing inflation and global uncertainty – prioritizing stability over premature tightening,” Hiroaki Amemiya, Investment Director at Capital Group, said Friday.

Its strategy is supportive of a reflationary cycle due to Japan’s macroeconomic environment, as opposed to the U.S. and Europe, which are cutting rates as inflation eases, Amemiya noted.

The yen is expected to strengthen as interest rate gaps narrow, which would enhance Japan’s purchasing power and support domestic demand, said Amemiya, who added that he was optimistic about the country’s outlook.

Other factors, such as corporate governance reforms, rising wages, and increased capital expenditure, are fueling domestic consumption and productivity.

“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.”

There are, however, growing calls for the BOJ to raise rates as Japan’s headline inflation stays above the bank’s 2% target for over three years.

In a Sep 12 note, HSBC analysts had pointed out Japan’s elevated inflationary pressure — driven by high rice prices — is also prompting louder calls for further rate hikes.

Senior Liberal Democratic Party member Taro Kono had reportedly said on Sept. 9 that “if the Bank of Japan delays a rate increase, I think it would mean inflation will continue and everything we import would be higher.”

But Junyu Tan, economist for North Asia at credit risk management Coface, held a different view, telling CNBC Friday that the high headline inflation has been “largely distorted by supply constraints and influenced by exogenous factors such as a weak yen and commodity price strength.”

Key domestic demand metrics, particularly service price growth, remain below target and have not risen fast enough to convince the BOJ to decisively shift its stance, he added.