Japan’s core inflation rises above the 2% target again

What happened

Consumer prices in Japan, excluding fresh food, were 2.1% higher in September than a year earlier, up from 1.7% in August. The figures were published on 23 October. This is the measure the Bank of Japan watches most closely, and it is now above the bank’s 2% target for the first time since December 2025.

Headline inflation, which includes everything, also rose to 2.1%, from 1.9%. A narrower measure that leaves out both fresh food and energy climbed to 2.4%, up from about 2% in August.

Why the narrow measure matters

Energy is not what pushed prices up this time. Government subsidies kept electricity bills lower than a year ago, and food inflation slowed. The rise came from other goods, such as household items and leisure, and from services, where price growth also picked up.

That matters because services prices are set inside the economy. They depend mostly on wages, so they move slowly and tend to stick. When core inflation rises while energy is held down, it suggests the pressure is domestic rather than imported.

This is the pattern central banks watch for. A one-off jump in oil can fade on its own. Price rises driven by wages and services usually do not.

Where it sits in the chain

This is link 1: an inflation reading above target. The next step is the central bank’s reaction. The Bank of Japan raised its policy rate to 1.25% in September. With prices now rising at 2.1%, the real policy rate (the policy rate minus inflation) is still below zero. In real terms, borrowing remains cheap, so policy is still adding to demand rather than restraining it.

A higher rate in Japan would also narrow the gap with US rates, which has kept the yen weak at around 157 per dollar. A weak yen raises the cost of imports.

What to watch

• The Bank of Japan’s decision on 30 October, and its new quarterly price forecasts published the same day.
• Whether services inflation keeps rising in October.
• The yen. A firmer yen would ease imported price pressure.