Japan Inflation Accelerates, Paving Way for Rate Hike

Inflation in Japan accelerated sharply in September, rising above the Bank of Japan’s (BoJ) target and paving the way for a further interest rate hike, official data showed on Friday. Excluding volatile fresh food, prices rose 2.1 percent, up from 1.7 percent in August, according to the internal affairs ministry, driven in particular by higher prices for processed foods amid soaring energy costs linked to conflict in the Middle East.

The figure was in line with market expectations and above the central bank’s 2 percent target. “With underlying inflation back above the Bank of Japan’s 2 percent target, the case for further tightening remains on solid ground,” said Abhijit Surya of Capital Economics. “News reports suggest that the Bank may revise up its inflation forecasts at its October meeting. That should set the stage for another hike in December.” The BoJ raised interest rates in mid-September, in line with other major central banks, to counter strong inflationary pressures from energy prices driven up by the Iran war. A weak yen is also pushing up the cost of imported goods.

Rents and car-related costs also contributed to inflation, the data showed, with Surya noting that rent inflation matched “its highest rate in nearly 25 years”. Government subsidies for gasoline and electricity bills eased the impact on energy prices, the ministry said. Excluding both fresh food and energy, inflation stood at 2.4 percent, above market expectations and up from 1.9 percent in August.

The government is trying to ease the pressure on household purchasing power, notably through a massive stimulus package adopted at the end of 2025 and extensive tax breaks on energy. The government has said it will cut the consumption tax on food from 8 percent to 1 percent for two years starting in April, a move media reports say will cost 10 trillion yen ($63 billion) in lost revenue. That has deepened concerns over Japan’s public finances, with the country’s debt more than double its annual economic output, one of the highest ratios in the world. Resource-poor Japan is heavily dependent on oil imports.