The latest report from ICICI Bank Research highlights that while consumer inflation in Japan remains below target, rising producer prices and wage growth are beginning to exert pressure on inflation expectations.
In August, headline consumer inflation and core inflation, excluding fresh food and energy, stood at 1.9% year-on-year, below the Bank of Japan's (BoJ) 2% target. However, producer price inflation surged to 7.6%, and goods inflation increased by 2.6%, driven by higher import costs due to yen depreciation.
The report notes that Japan's nominal wage growth averaged 3.5% in 2026, with real wages also showing positive gains, potentially reinforcing inflation expectations.
“While inflationary pressures have remained benign in the August CPI print, inflation expectations are continuing to rise.”
ICICI Bank Research
BoJ Governor Ueda has expressed concerns about the central bank lagging in addressing inflation, emphasizing the need to avoid scenarios similar to the US and Europe in 2022.
Despite higher energy prices impacting growth, Japan's economy is expected to be supported by AI-related demand, rising corporate profits, and resilient consumption.
Background
Japan has been grappling with low inflation for years, and the BoJ has maintained an accommodative monetary policy to spur economic growth. However, recent global economic shifts and domestic wage increases are challenging this stance.
Looking ahead, the yen is expected to remain weak, trading in the 157-161 range against the USD in the near term, with further depreciation likely over the medium term.
