Japan’s core inflation rate decreased to 2.7% for August, the third month in a row for the core rate to drop. This resulting reduction is a historic shift in the economic calculus. This clocked core inflation at its 11-month low since November 2022. Japan’s headline inflation has come off the boil, falling to 2.7%, down from 3.1% in July. The August decline is evidence of a turning point toward more deflationary price pressures in the economy.
Japan recently announced a 0.3% GDP growth for the second quarter of 2025, quarter-on-quarter. This news comes at the same time as a dramatic slowdown in inflation – a welcome development. This figure exceeds economists’ expectations of a mere 0.1% increase and demonstrates a recovery trajectory, particularly bolstered by Japan’s resilient export sector. Polemicists remind us that exports highly obfuscated the growth. This surge contributed significantly to fostering the state’s overall economic success during the period.
Japan’s contrasting recent economic developments are remarkable in large part due to a tariff deal with Washington. As of late July, this pact has reduced tariffs for Japanese exports from 25% down to 15%. This deal helps relieve the burden put on Japanese exporters. Accordingly, it may be the most important factor behind boosting the unsustainable, high second quarter GDP growth.
Elevated inflationary pressures are still worrisome to policymakers, fueled mostly by increasing rice prices. With inflation still stubbornly present, it seems everyone from Wall Street to Main Street is calling for just one more interest rate increase. Most analysts expect the Bank of Japan (BOJ) to increase its policy rate by 25 bps during its October meeting.
“And we believe that the second quarter GDP print, which [outperformed market expectations], certainly delivered.” – HSBC analysts
Taro Kono, a leading contender for the next prime minister, raised alarms about the risk of an even longer halt to rate increases by the BOJ. He cautioned that further inaction could mean sustained inflation and rising prices on imported goods.
“If the Bank of Japan delays a rate increase, I think it would mean inflation will continue and everything we import would be higher.” – Taro Kono