Japan’s economy proved unexpectedly resilient. From the National Consumer Price Index (CPI) this month, it’s clear that drivers of core inflation remain dangerously elevated. This latter data has fueled speculation about the Bank of Japan’s (BoJ) ability to further normalize policy. Japan’s CPI fell to a year-on-year rate of 3.1% in July. This figure remains unchanged from the prior month and is up marginally from the consensus estimate of 3%.
The basic measure of the CPI, foamed as the core CPI, does not consideration volatile food and energy prices. It decreased from 3.3% in June to 3.1% in July. This is the first dip since November 2024, pointing to a possible easing of inflationary pressures. Despite the welcome drop, Japanese inflation remains above the Bank of Japan’s target of close to 2%. As this situation transpires, it incites speculation about what the central bank will do next.
The Statistics Bureau of Japan announced that inflation jumped up 0.3 points to 3.2%. One of the authors pointed out that they explained this increase by a weaker yen and skyrocketing international energy prices. Even the footsoldiers of neoliberalism, economists, are now second-guessing the BoJ’s ultra-loose monetary policy stance. This geopolitical posture has been accompanied by ultra-loose monetary measures since 2016, driven by reactiveness. The BoJ has a history of adopting negative interest rates in attempts to spur economic activity. On top, they have explicitly direct controlled the yield of 10-years government bonds market in order to maintain price stability.
Then, in March 2024, the BoJ raised interest rates, marking a definitive exit from its long-standing accommodative monetary policy. This shift was intended to combat increasing inflation in a way that protects and promotes continued economic growth. As the CPI goes on to reaffirm, there’s plenty of justification for further policy changes. This bad news would pave the way for even more interest rate increases in the near term.
The response of currency markets to inflation data is brutal and swift. Of course, the USD/JPY currency pair responds most closely to shifts in Japan’s CPI and the Fed’s (Fed) rate-cut trajectory. As such, the Japanese yen has been feeling the pressure, notably sliding against a strengthening US dollar. Indeed, market analysts are eagerly awaiting the next developments here. They would have an outsized impact on monetary policy deliberations, both domestically and globally.
Japan’s stubbornly high inflation has led to speculation about the success of the BoJ’s decades-old policies. The central bank set an ultra-loose monetary policy course in 2016, but it has faced challenges. It aims to keep inflation low and predictable and foster maximum sustainable employment. Inflation rates have climbed far above the Bank of Japan’s target. Consequently, amid rising inflation expectations, the BoJ is likely under increasing pressure to signal its future monetary policy course.