Following in the footsteps of the Federal Reserve, the Bank of Japan (BOJ) will also hold its October monetary policy meeting to decide the direction of its policy interest rate. Currently, the market widely expects it to keep the current interest rate level unchanged, in line with the Fed. The timing of its further rate hike is expected to be in December. According to Kyodo News, this BOJ monetary policy meeting will be special, as it will make a formal judgment on whether price increases have reached the long-term target of 2%. According to the central bank's plan, this formal stance will be reflected in the Outlook for Economic Activity and Prices report released after the meeting. From a cyclical perspective, this indeed carries historic symbolic significance.
In March 2013, after taking office as Governor of the BOJ, Haruhiko Kuroda announced the goal of achieving a 2% consumer price index increase within two years and launched unconventional large-scale monetary easing. However, until Kuroda stepped down in 2023, the inflation target had not been effectively met. Kuroda expressed regret over this, but he also noted that the time to achieve the 2% stable target was getting closer, believing that the deflationary mindset of the Japanese public was beginning to change, and projected that the inflation rate might temporarily fall below 2% but would not remain below 2% for long. Nevertheless, by 2023, Japan's core CPI was already above 2%, though it was then seen as a short-term effect of the pandemic shock and the Russia-Ukraine conflict. If this meeting formally confirms the achievement of the inflation target, it means that the BOJ has finally achieved this goal after a span of 14 years. This also marks Japan's official entry into a new inflation cycle, and of course implies that the central bank will continue to promote the normalization of monetary policy, bringing the policy path of "manufacturing inflation" through monetary policy to a formal end.
Judging from inflation data, starting in 2022, Japan's core consumer price index (CPI) excluding fresh food has remained above the 2% target for four consecutive years. However, since 2026, the index has experienced a pullback. The latest data show that the year-on-year growth rate of Japan's national CPI in September accelerated from 1.9% the previous month to 2.1%. Core CPI, which excludes volatile fresh food, also rose by 2.1%, marking the strongest reading since December 2025. In addition, core CPI excluding fresh food and energy rose to 2.5% that month, hitting a 10-month high. For the BOJ, higher inflation levels provide a more solid justification for rate hikes and make the realization of the inflation target more practically meaningful.
The BOJ has consistently emphasized that inflation data is not the only criterion for judging whether inflation is sustainable. It previously stated that the focus would be on examining trend inflation, which excludes temporary factors, as well as whether wages can continue to rise. In other words, its primary consideration is whether Japan's inflation is sustainable. Currently, the impact of imported inflation, such as energy, has spread to the service sector and influenced wage growth. This is another layer of factors considered by the Japanese central bank. Naturally, the BOJ's reluctance to readily acknowledge the achievement of the inflation target also stems from concerns. It worries not only about excessive inflation, but even more about rapid rate hikes impacting the Japanese economy and capital market pricing. Precisely for this reason, since Japan bid farewell to negative interest rates in 2024, it has maintained a cautious attitude toward monetary tightening. In fact, even though the BOJ is about to announce this news, it is not in a rush to raise interest rates, choosing instead to wait until December. On the one hand, although inflation continues to rise, it remains mild without turning into vicious inflation. On the other hand, it remains concerned about the impact of rate hikes on the Japanese economy. Even with Japan's inflation remaining at a relatively high level above 2% for years, the country's economic growth continues to be rather sluggish. While maintaining positive growth, the pace is not high enough. The BOJ's long-term goal of achieving economic growth has still not been effectively fulfilled.
Amid rising inflation and continuous interest rate hikes by the central bank, the Japanese economy has shown signs of a mild slowdown. Japan's real GDP grew by only 0.1% year-on-year for the whole of 2024, and real GDP grew by 1.1% for the whole of 2025, showing a notable improvement compared to 2024. However, the situation fluctuated again in 2026. Economic growth in the first quarter of 2026 was 0.4% year-on-year, and real GDP in the second quarter grew by 0.3% quarter-on-quarter, with the year-on-year growth rate reaching 0.73%. Although the quarterly performance was better than the first quarter, the overall performance was weaker than the same period in 2025. Structurally, under the pressure of yen depreciation, personal consumption in Japan was basically stagnant during the quarter, and business capital investment fell for two consecutive quarters, indicating insufficient domestic demand momentum, with growth mainly supported by net exports, inventory, and government consumption. Although the IMF raised its forecast for Japan's economic growth rate in 2026 to 0.7%, it remains far lower than 2025, and the BOJ expects economic growth rates for fiscal years 2026 and 2027 to be 0.6% and 0.8% respectively. Exports related to artificial intelligence have remained robust and are expected to offset some of the drag caused by weak domestic consumption. The sluggish economic performance demonstrates that domestic demand in Japan continues to be affected as inflation rises continuously. In particular, the ongoing depreciation of the Japanese yen in recent years, while favoring exports and raising import prices to drive up imported inflation, has likewise exerted a clear dampening effect on domestic demand. It is noteworthy that the wage growth rate of Japanese workers has lagged behind inflation for a long time. Under the new inflation cycle, domestic residents in Japan have become victims of high inflation; not only do their savings struggle to beat inflation due to extremely low interest rates, but their real wages also continue to shrink. The linkage among wages, income, and consumption has still not broken free from a negative cycle.
Domestically, the labor bottleneck brought by long-term aging leaves the Japanese economy lacking growth momentum on both the supply side and the demand side. Although the global AI boom has driven relatively rapid growth in industries such as semiconductors, it is difficult to effectively support sustained growth across the entire economy. Meanwhile, due to heavy overseas investment by Japanese enterprises under long-term easing policies, Japan's domestic demand lacks momentum in both consumption and investment, making it difficult for its economy to grow effectively.
Another issue is that the continuous rise in Japan's inflation level is closely related to imported inflation caused by the depreciation of the yen. Since Sanae Takaichi took office in October 2025, the yen has depreciated by about 7% against the U.S. dollar, with the exchange rate dropping from around JPY 151 per dollar at the time of taking office to briefly hit the 164 mark at the end of July this year, setting a low of about 39 years, and currently still hovering weakly around 156. Both energy prices and food prices have surged significantly due to the sharp depreciation of the yen. While this stimulated consumption in the short term, it has also substantially eroded residents' wealth and potential consumer demand. Even if the BOJ continues to raise interest rates consecutively, it will still be ineffective. Furthermore, escalating geopolitical risks pose a significant threat to Japan’s energy security and stability. In fact, they also constrain the supply side, limiting overall output. At the same time, these risks place constraints on Japan’s export trade, while deglobalization and trade sanctions further undermine the stability of the Japanese economy.
As it stands, the Japanese government under Sanae Takaichi continues to adhere to an active fiscal policy and keeps promoting the expansion of government spending. On one hand, it has proposed increasing subsidies for residents to make up for losses caused by food inflation. On the other hand, the Japanese government stimulates investors to increase investment efforts through fiscal means, with investments particularly in high-tech fields like semiconductors remaining prominent. Therefore, even though the BOJ has initiated monetary tightening, the Japanese government is “creating” inflation on its end. This policy will offset the effects of the BOJ's interest rate hikes to a certain extent. At the same time, this means that the economic foundation of Japan continues to be eroded by long-term inflation, and stagflation characteristics remain evident. After inflation entered the new cycle, Japan's economic growth still lags, with insufficient momentum.
Final analysis conclusion:
With core inflation remaining persistently above the 2% target, the Bank of Japan may declare that it has achieved the monetary policy target set 13 years ago. This would mark a significant turning point, signaling the start of a new inflationary phase in Japan and the gradual normalization of its monetary policy. However, against the backdrop of continued fiscal expansion, rising geopolitical risks and domestic structural changes, Japan’s economy is still likely to struggle to break away from its prolonged low-growth trajectory. Its underlying growth momentum remains weak, with insufficient endogenous drivers to sustain a stronger recovery. Hence, the outlook for Japan’s economy should be approached with caution rather than excessive optimism.
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Dr. Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.
