Inflation in Japan might be tougher to tame than expected, putting real wage growth at risk and possibly becoming a drag on much-needed household consumption.
“Although the Bank of Japan forecasts a slowdown in food price growth and overall inflation from the second half of 2025, it's important to keep in mind that this may not actually happen,” said Saisuke Sakai, chief economist at Mizuho Research & Technologies.
Japan struggled with deflation for decades and kept rates at or near zero for years to get prices rising again. They are now increasing and are becoming an issue for workers, who are finding their wages barely growing or actually declining month to month on a real basis.
Real wages in Japan fell 0.2% in 2024, a third straight year of contraction.
In 2024, the consumer price index rose 2.7%, less than the previous year, but still one of the fastest rates in a decade. The rate also ticked up significantly toward the end of the year.
Inflation was 2.3% in October and 2.9% in November, before hitting 3.6% in December. Food inflation was 6.4% that month, with fresh food prices rising 17.3%. Core inflation has also been on the rise, hitting 3.0% in December.
The central bank is starting to revise its forecasts higher.
In its quarterly updated outlook report, issued Jan. 24, the central bank estimates a 2.4% increase in consumer prices excluding fresh food for the year starting March, up from the 1.9% estimated in its report last October.
The BOJ explained that the upward revision is mainly due to cost-push factors, such as increases in imported goods due to the yen’s weakening. The bank said recent increases in the price of rice are also driving inflation.
Central bank Gov. Kazuo Ueda stressed that inflation pressure will likely start easing in the second half of the year, with the bank estimating consumer prices to increase just 2% in fiscal 2026.
“Underlying inflation seems to be still within the range of a gradual upward trend, as we have expected,” Ueda said.
The bank now projects that consumer prices, excluding fresh food, for the fiscal year through March will rise 2.7%, compared with an expected 2.5% increase in its previous report.
Japan’s consumer price increases, excluding those for fresh food, have been above the BOJ’s 2% target for nearly three years.
The BOJ acknowledges that inflation may be stickier and stay higher than expected.
According to a summary of opinions from a two-day policy meeting last month, some BOJ board members pointed out that the price trend needs to be closely monitored.
“The focus, at this point, is on the sustainability of the momentum in wage hikes in the annual spring labor-management wage negotiations, and on the future course of the higher prices that stem from the rise in prices of rice and fresh food and from the continued depreciation of the yen against the dollar,” the document said.
Two variable will likely be key in the outlook of inflation — the exchange rate and food prices.
Due to uncertainties related to the economic policies of U.S. President Donald Trump, “especially regarding tariffs, it's incredibly difficult to forecast which way the exchange rate will go,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.
“If the United States were to implement tariffs aggressively, it could lead to higher inflation there, forcing the Fed to raise rates, which would strengthen the dollar. So, there are certainly some risks."
When gauging the underlying inflation trend, temporary factors, such as fresh food prices, are often excluded, but Sakai points out that it might be time to reconsider this way of thinking.
In the past decade, fresh food prices have been trending upward partly because of unpredictable weather events, such as extreme summer heat and heavy rain.
Climate change will likely continue to affect weather, while the number of agricultural workers will decrease, Sakai said. He added that costlier fresh food can push up prices for food-related items included in the calculation of core inflation because it forms their raw materials.
"In my opinion, fresh food prices won't go down and the upward trend will continue,” he said, adding that the BOJ might change its view that they don’t affect the underlying inflation trend.
Ueda did change his view on the impact of the foreign exchange rate on inflation.
In April last year, the governor said the impact of the weak yen was negligible, and his comment put downward pressure on the yen. The governor then changed his stance, saying the currency rate could affect the underlying inflation trend, so the bank might need to introduce countermeasures.
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