Global Market: Bank of Japan achieves 2% inflation target after 13 years

The Bank of Japan (BoJ) on Friday said Japan had finally achieved its long-standing inflation target of 2%.

The central bank said underlying consumer price inflation had reached a level broadly consistent with its 2% price stability target and was expected to remain around that level. The milestone marks the first time the BoJ has formally confirmed that Japan's underlying inflation trend has achieved its long-standing objective, despite core inflation intermittently exceeding the target in recent years, AFP reported.

Japan introduced the 2% inflation target in 2013 as part of an aggressive monetary easing programme aimed at ending a prolonged period of falling prices that had weighed on economic growth and discouraged consumer spending and business investment.

In its latest policy decision, the BoJ kept its benchmark interest rate unchanged at 1.25%, with eight of the nine policymakers voting in favour of holding rates steady. The decision followed monetary policy announcements by the US Federal Reserve and the European Central Bank earlier this week, both of which also left their respective policy rates unchanged.

Despite the pause, expectations of another rate increase in December are building as inflationary pressures persist and the yen remains weak. Japan has experienced sustained consumer price increases since spring 2022, prompting the central bank to begin unwinding its ultra-loose monetary policy in March 2024 after nearly a decade of extraordinary monetary support, AFP reported.

Government data released last week showed Japan's core consumer inflation accelerated to 2.1% in September from 1.7% in August, highlighting the continuing pressure on household budgets.

The BoJ warned that the year-on-year increase in the consumer price index excluding fresh food was likely to accelerate to a level clearly above 2%. It pointed to several factors driving the outlook, including higher oil prices, which are expected to push up energy and goods costs, as well as rising semiconductor prices amid increasing global demand linked to artificial intelligence investments.

The central bank also identified the depreciation of the yen as an additional source of inflationary pressure, as a weaker currency raises the cost of imported goods and raw materials.

The latest assessment reinforces expectations that the BoJ could continue raising borrowing costs as it seeks to balance price stability with economic growth. The central bank has been gradually moving away from its prolonged period of ultra-loose monetary policy, although policymakers remain cautious about the pace of further tightening.

Marcel Thieliant of Capital Economics said further monetary tightening appeared highly likely, forecasting that Japan's policy rate could reach 2% by the middle of next year. He also indicated that the risks were tilted towards additional rate increases beyond that level, according to the AFP report.

The BoJ's latest assessment marks a significant turning point for Japan's economy, with the central bank finally declaring its inflation objective achieved after more than a decade of extraordinary monetary easing. However, persistent price pressures, higher energy costs and yen weakness could keep policymakers on a tightening path in the months ahead.