Japan’s inflation story took another turn in September, as official data released on October 24, 2025, revealed that core consumer prices rose 2.9% year-on-year—an acceleration from August’s 2.7% and a figure that matched market forecasts. This uptick, announced just days before the Bank of Japan’s (BOJ) highly anticipated policy meeting on October 29 and 30, has reignited debate over when the central bank might finally resume its rate-hike cycle following years of ultra-loose monetary policy. Yet, a closer look at the numbers suggests the path ahead is anything but straightforward.
According to the Japan Statistics Bureau, the National Consumer Price Index (CPI), which excludes fresh food but includes fuel, also climbed 2.9% year-on-year in September. This data point, widely watched by analysts and policymakers alike, came in right on target with market consensus. The story, however, gets more nuanced when one examines the BOJ’s preferred “core-core” index. This measure, which strips out both fresh food and volatile energy costs, actually slowed to 3.0% in September from 3.3% in August.
So, what’s driving these headline numbers? The answer: a renewed surge in energy costs and persistently high food prices, with the latter jumping a striking 7.6% year-on-year. Goods prices as a whole leapt 4.2%, while service-sector inflation lagged behind at just 1.4%. This persistent gap between goods and services inflation hints at a deeper structural issue—the slow pace at which Japanese firms are passing on higher labor costs to consumers, a key ingredient for the kind of “sustained inflation” the BOJ wants to see before tightening monetary policy further.
“As things stand, both inflation excluding fresh food and inflation excluding fresh food and energy are on track to meet or overshoot the BOJ’s forecast for the ongoing fiscal year,” said Abhijit Surya, senior economist at Capital Economics, as quoted by Reuters. “Even so, the Bank’s messaging has remained cautious in recent weeks, and it doesn’t suggest that a rate hike is imminent.” Surya, like many of his peers, projects that the BOJ will likely wait until January 2026 before hiking rates from the current 0.5% level.
That cautious approach is mirrored within the BOJ’s own board. At the September 2025 meeting, two of the nine board members broke ranks and proposed raising interest rates to 0.75%. Their proposal was ultimately defeated by a majority who opted to keep rates steady. The dissent, however, marks a growing awareness of inflationary risks within the central bank, even as most economists and investors expect the BOJ to hold rates steady at its upcoming October meeting.
Governor Kazuo Ueda has been especially circumspect, emphasizing the need to tread carefully given uncertainties about the impact of U.S. tariffs on Japan’s economy. Ueda has repeatedly stated that the BOJ needs to see “sustained inflation driven by solid domestic demand and wage gains” before resuming its rate-hike cycle. The central bank, for its part, exited a decade-long radical stimulus program last year and raised short-term interest rates to 0.5% in January 2025—a significant shift after years of negative or near-zero rates.
The BOJ’s wait-and-see stance has had ripple effects in financial markets. Following the latest inflation data, the USD/JPY currency pair rose 0.45% on the day to 152.65, reflecting renewed pressure on the Japanese yen. As noted by FXStreet, the yen’s value is heavily influenced by BOJ policy and the interest-rate differential between Japanese and U.S. bonds. The BOJ’s cautious approach, especially compared to more aggressive tightening by other central banks in recent years, has contributed to a weaker yen—a development that, while beneficial for exporters and the Nikkei stock index, raises concerns about imported inflation and household purchasing power.
Overlaying all of this is the political backdrop. Japan’s new Prime Minister, Sanae Takaichi, has just taken office and is expected to deliver her maiden policy speech promising economic measures to ease pressure on households. Takaichi has emphasized that the government should ultimately be responsible for economic policy and has called for close coordination with the BOJ. Her administration’s stance could influence the central bank’s calculus, especially as policymakers weigh the risks of inflation against the need to support a still-fragile recovery.
Indeed, not all the economic signals are flashing green. The latest flash purchasing managers index (PMI) data from S&P Global Market Intelligence pointed to a further loss of growth momentum in Japan’s private sector in October. Manufacturing remains stuck in decline, and while services continue to be a growth engine, that momentum appears to be fading—a point of concern for policymakers and businesses alike.
“With policymakers still keen to gather more information on the health of the economy, we suspect the next rate hike will only take place in January,” Surya of Capital Economics noted in a recent report. The BOJ board, meanwhile, remains divided—not just over the pace of inflation, but also over external risks such as U.S. tariffs and their potential spillover effects on corporate profits and wage growth.
The BOJ’s next move is also being closely watched by global investors, given the yen’s reputation as a safe-haven currency. In times of market stress, the yen typically strengthens as investors seek out its perceived stability. However, the divergence in interest-rate policies between Japan and other major economies has, over the last decade, made the yen less attractive relative to the U.S. dollar and other peers. The gradual unwinding of Japan’s ultra-loose policy, alongside recent rate cuts by other major central banks, could eventually narrow this gap, but for now, the yen remains under pressure.
For Japanese households, the stakes are high. While inflation has exceeded the BOJ’s 2% target for more than three years, wage growth has lagged, and the cost of essentials like food and energy continues to climb. Prime Minister Takaichi’s promise to ease these pressures will be tested in the months ahead, especially if the BOJ sticks to its cautious stance and holds off on further tightening until 2026.
As the October 29-30 BOJ meeting approaches, all eyes are on the central bank’s messaging and its quarterly growth and price forecasts. Will the BOJ stick to its guns, or will growing dissent on the board and persistent inflationary pressures force its hand sooner than expected? For now, the consensus is clear: caution reigns in Tokyo, but the stakes for Japan’s economy—and for households feeling the pinch—have rarely been higher.
