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Japan’s Inflation Remains Above BOJ’s Target for 17 Consecutive Months, Raising Policy Questions

On September 22, the Japanese government announced that Japan’s inflation rate has surpassed the Bank of Japan’s (BOJ) target of 2% for the 17th consecutive month, signaling a persistent trend of mounting inflationary pressures. This sustained rise in inflation levels may prompt the BOJ to consider the possibility of discontinuing its ultra-loose monetary policy.

The Core Consumer Price Index (Core CPI), which excludes fresh food prices but includes fuel, registered a year-on-year increase of 3.1% in August. This figure exceeded market expectations, which had anticipated a 3.0% rise. Notably, the August core CPI remained at the same level as July, maintaining a 3.1% expansion.

Similarly, the Core-Core CPI index, which excludes both fuel and fresh food prices, experienced a 4.3% year-on-year increase in August. This rate mirrored the growth observed in July, indicating a consistent upward inflationary trend.

Financial markets are now speculating that these elevated inflation figures may lead the BOJ to consider the gradual withdrawal of its accommodative monetary policy in the near future.

During its most recent meeting, the BOJ’s board voted to maintain its ultra-accommodative monetary policy, keeping the policy interest rate at -0.1% and targeting a 10-year Japanese government bond yield of approximately 0%. This decision suggests that the BOJ remains cautious about the economic outlook, both domestically and globally.

However, analysts widely anticipate that the BOJ may start phasing out its special monetary easing policy in the first half of 2024. This expectation follows comments made by BOJ Governor Haruhiko Kuroda, who stated in a recent interview with the Yomiuri Shimbun on September 9 that the BOJ will have sufficient data by the year’s end to make an informed decision regarding the timeline for discontinuing the negative interest rate policy.

As Japan grapples with sustained inflationary pressures and considers potential shifts in monetary policy, the decisions made by the BOJ will carry significant implications for the nation’s economic trajectory and financial markets.

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