The Bank of Japan (BoJ) has released a review on the concept and measurement of underlying inflation, emphasizing the need for a comprehensive assessment using a wide range of economic and price data from multiple perspectives [1]. The review notes that recent increases in food prices, if sustained, could have a lasting upward effect on overall consumer prices [1]. Composite indicators show that medium- to long-term inflation expectations are gradually rising toward the BoJ's 2% target, with the underlying inflation rate also moving moderately in that direction [1].
Labor market conditions in Japan remain extremely tight, and wages are rising moderately, with firms continuing to pass on higher wage costs. This has resulted in a mechanism where wages and prices rise moderately in tandem, supporting the upward trend in underlying inflation [1]. The BoJ highlights the importance of monitoring whether inflation becomes firmly anchored at around 2% for the sustainable achievement of its target [1]. Additionally, the review points out that increases in crude oil prices can influence underlying inflation in both upward and downward directions [1].
The BoJ's policy history is also outlined, noting its ultra-loose monetary stance since 2013, which included Quantitative and Qualitative Easing (QQE), negative interest rates, and yield curve control. In March 2024, the BoJ lifted interest rates, signaling a retreat from its ultra-loose policy [1]. This shift was prompted by a weaker Yen and rising global energy prices, which pushed Japanese inflation above the BoJ's 2% target [1].
The BoJ's decisions have had a significant impact on the Japanese Yen, with the massive stimulus leading to Yen depreciation against major currencies. This trend reversed somewhat in 2024 following the BoJ's policy adjustment [1].
CONCLUSION
The Bank of Japan's review underscores a moderate rise in underlying inflation toward its 2% target, supported by tight labor markets and wage growth. The recent policy shift away from ultra-loose monetary measures has begun to stabilize the Yen and address inflationary pressures. Market participants will closely monitor whether inflation becomes firmly anchored at the target level.