Japan’s inflation above target for over 3 years, but where is BOJ?

Major central banks have hiked their policy rates in the face of surging inflation since the Covid-19 pandemic — but the Bank of Japan has been an outlier.

It has stayed put despite headline and core inflation running above its target of 2% since April 2022, and despite headline inflation’s two-year high of 4% in January. So-called “core-core” inflation has run above the target since October 2022.

The BOJ has raised rates by just 60 basis points in the 14 months since March 2024, when it abandoned its negative interest rate policy. It held its policy rate at 0.5% in its most recent policy meeting in June, saying that “underlying CPI inflation is likely to be sluggish, mainly due to the deceleration in the economy.”

The U.S. Federal Reserve raised rates for the first time since 2018 in March 2022, and every major central bank except the BOJ raised rates that year.

In Japan, the main driver of inflation is food prices, specifically rice prices.

Rice prices in the country rose sharply in the second half of 2024 and accelerated further in the first half of 2025, mainly due to poor harvests in 2023 and 2024.

In May, rice prices more than doubled, skyrocketing 101.7%. That marked the largest increase in more than half a century.

Marcella Chow, global market strategist at JP Morgan Asset Management, noted that rice accounts for approximately half of Japan’s core inflation, and future inflation trends are heavily reliant on food prices, especially rice.

But despite such a sharp rise in prices, experts said the BOJ will not move on its policy rate as the central bank views the spike in inflation as temporary.

BOJ Governor Kazuo Ueda said in a press conference after the BOJ’s June meeting that “When we look at recent data, consumer inflation is moving around 3%. But this is mostly due to rising import costs and rice prices … we expect such pressures to dissipate,” according to comments translated by Reuters.

JPM’s Chow noted Ueda also pointed out that underlying inflation, a greater focus for the BOJ, remains below 2%. The BOJ does not publicly reveal the components that define “underlying inflation.”

“This indicates that the central bank considers the recent spike in rice prices to be temporary,” she said, adding “Mr. Ueda does not believe the BOJ is lagging behind, given that the upward trend in underlying inflation is not accelerating.”

Yujiro Goto, head of foreign exchange strategy for Japan at Nomura, told CNBC that the current inflation spike, especially in food inflation, is mostly due to supply issues, not strong demand.

“Thus, the BOJ judges that the Bank does not need to react to the surge in inflation, which is just cost-push inflation. Against cost-push inflation, rate hikes may not be very effective to slow inflation,” Goto said.

That view is supported by Kei Okamura, a portfolio manager at Neuberger Berman, who said on “Squawk Box Asia” that price pressures from foodstuffs are likely to wane over the next few months.

Growth concerns are another big reason the BOJ is likely to hold back on raising rates.

On Wednesday, a BOJ summary of opinions from its June meeting revealed that some board members expressed that rates should be kept at current levels.

Higher rates generally help to curb inflation, but they can also constrain economic growth.

Chow pointed out that there would be geopolitical uncertainty ahead for the country, including the upcoming Upper House election, as well as tariff and trade uncertainties. The election may present political challenges for the Ishiba administration, she said.

Those could pose risks to growth, which means a policy rate hike could come later rather than sooner.

Nomura’s Goto is, likewise, of the view that growth concerns will hold the BOJ back from rate hikes, considering that Japan has not reached agreement with the U.S. on trade.

“Due to higher tariffs on Japan (10% universal tariffs plus sectoral tariffs such as auto and steel), we expect Japanese economy to record [a] small negative growth in July-September quarter, which warrants the pause for the time being, at least until September this year,” he told CNBC.

Japan is currently locked in trade negotiations with the U.S. with no clear sign of an agreement. On June 20, the country’s top trade negotiator Ryosei Akazawa reportedly said that trade negotiations with the U.S. “remained in a fog.” 

If the two sides don’t reach a deal, a 25% “reciprocal” tariff will be slapped on Japanese imports into the U.S.

Raising rates could strengthen the yen, which would make Japanese exports less competitive and restrict growth at a time when the export-oriented economy is facing headwinds.

The country’s most recent trade data revealed that Japan’s exports in May declined 1.7% year over year, marking the sharpest decline since September 2024.

Japan’s gross domestic product also declined for the first time in a year, falling 0.2% quarter on quarter in the three months ended March as exports fell sharply.

The BOJ could also be taking lessons from history. Frederic Neumann, chief Asia economist at HSBC, told CNBC that the BOJ has experienced decades of persistent deflationary pressures and “several episodes of false dawns that prompted premature tightening.”

Consequently, the bank is now taking its time to normalize policy. Neumann noted that the BOJ is taking a slow approach to raising rates because the rise in inflation was mainly driven by the sharp depreciation of the Japanese yen, with only a “tentative sign of a sustained wage-price cycle.”

BOJ board member Naoki Tamura, however, said in a speech on Wednesday that the bank may need to raise interest rates “decisively” if upside risks to prices grow.

Since April 2022, the Japanese yen has weakened from about 120 yen against the dollar to its current levels of around 150. In 2024, the currency weakened to 161.99 on July 3, marking its weakest level against the dollar in about 38 years.

Separately, Neumann said, “A period of inflation overshoot may arguably be necessary to shake Japanese households and businesses out of their expectations of limited price gains over time.”

He said although the BOJ’s “go-it-slow” approach is justified, Japanese monetary officials need to be wary of normalizing policy too late.

“The BOJ faces a tough, narrow path ahead, needing to raise fast enough to prevent inflation expectations from shooting up, but not too fast as to see the economy fall back into its earlier deflationary morass.”