^{Getty Images}

Inflation Remains Sticky Despite Modest Cooling

Japan’s consumer inflation eased slightly in November but remained firmly above the Bank of Japan’s 2 percent target for the 44th consecutive month, reinforcing the case for further monetary tightening. Headline inflation slowed to 2.9 percent from 3 percent in October, reflecting some moderation in food related price pressures, but still signaling persistent underlying inflation.

The data arrives at a critical moment, with the BOJ widely expected to raise interest rates to levels not seen since the mid 1990s as it concludes its latest policy meeting.

Core Measures Signal Ongoing Price Pressure

Core inflation, which excludes fresh food prices, held steady at 3 percent in November, matching market expectations and showing little sign of easing. A more closely watched measure, often referred to as “core core” inflation, which strips out both food and energy costs, edged down slightly to 3 percent from 3.1 percent in October.

Economists view this measure as a better gauge of demand driven inflation, and its persistence suggests that price pressures are no longer purely the result of temporary supply shocks.

Rice prices, a major driver of food inflation earlier this year, continued to cool for a sixth straight month. Rice inflation slowed to 37.1 percent year on year, a sharp deceleration from May, when prices more than doubled and marked the fastest increase in over half a century.

Implications for BOJ Policy

The inflation figures strengthen expectations that the Bank of Japan will proceed with a rate hike, taking policy rates to their highest level since 1995. A higher policy rate would mark another step in Japan’s gradual exit from decades of ultra loose monetary policy.

Economists note that higher rates could help anchor inflation closer to the BOJ’s target over time. However, policymakers face a delicate balancing act, as tightening financial conditions could further weigh on an economy that is already showing signs of weakness.

Growth Risks Complicate the Outlook

Japan’s economic momentum remains fragile. Revised gross domestic product data for the third quarter showed that the economy contracted more sharply than initially estimated, shrinking 0.6 percent quarter on quarter and 2.3 percent on an annualized basis.

This slowdown raises concerns that aggressive rate hikes could dampen consumer spending and business investment just as inflation begins to show early signs of moderation.

Prime Minister Sanae Takaichi has publicly emphasized the need for proactive fiscal spending to support growth and boost tax revenues, warning against excessive fiscal tightening. She has also expressed skepticism over rapid rate increases, arguing that monetary policy should remain supportive while the recovery remains uneven.

Debate Over the Neutral Rate

Senior policymakers continue to debate how far interest rates should ultimately rise. Bank of Japan Deputy Governor Masazumi Wakatabe has argued that Japan must lift its neutral rate of interest by strengthening the economy’s long term growth potential through fiscal investment and structural reforms.

The neutral rate refers to the level of interest rates that neither stimulates nor restrains economic activity. If Japan’s neutral rate rises, Wakatabe said, higher policy rates would be justified. At the same time, he cautioned that the BOJ must avoid tightening too quickly or withdrawing support prematurely.

BOJ Governor Kazuo Ueda has acknowledged the uncertainty surrounding the terminal rate, with estimates ranging broadly between 1 percent and 2.5 percent.

Currency and Market Reaction

Financial markets responded calmly to the inflation data. The yen strengthened slightly, trading near 155.5 against the dollar, as expectations of higher interest rates provided some support to the currency. Japanese government bond yields remained elevated, with the 10 year yield hovering just below 2 percent, near multi decade highs.

Equities also advanced, with the Nikkei 225 gaining around 0.7 percent, reflecting investor confidence that corporate earnings can withstand modestly tighter financial conditions.

What Lies Ahead

Economists broadly expect inflation pressures to ease gradually as food price inflation fades and government measures to cushion living costs take effect. Some forecasts suggest that underlying inflation could stabilize closer to 2 percent by mid 2026.

However, risks remain skewed to the upside. Further supply shocks or renewed yen weakness could prolong cost driven inflation, complicating the BOJ’s path toward policy normalization.

For now, Japan’s inflation data keeps the central bank on course toward higher rates, even as policymakers weigh the challenge of containing prices without undermining a still fragile economic recovery.