Japan's Core Inflation Rises to 2.1%, Above the Bank of Japan's Target for the First Time in Nine Months

Japan's core consumer prices, which exclude fresh food, rose 2.1% in September from a year earlier. The Japan Times reported that inflation broke 2% for the first time this year, which puts pressure on the Bank of Japan (BoJ) to raise rates by year-end. Reuters, via US News, named three causes: higher fuel costs from the Middle East conflict, import prices lifted by a weak yen, and demand linked to AI. Those pressures are offsetting government fuel subsidies.

The BoJ raised its key rate to 1.25% in September, a 31-year high. Economists expect it to hold at the October 29-30 meeting, possibly raise its inflation forecast, and move again in December, Reuters reported. The yen traded near 156.9 per dollar on Friday, according to Trading Economics.

The BoJ's semiannual Financial System Report, released Thursday, said global AI-related demand had lifted share prices and kept corporate bond spreads low. It listed three areas of high uncertainty: the Middle East, the profitability of AI investment, and overseas non-bank lenders. The Japanese-language summary says the bank's macro stress test now models a fall in expected AI returns to check whether banks hold enough capital. It also warns that a shrinking population could cut corporate demand for loans over time and push lenders toward excessive risk in search of yield. Reuters reported that the bank sees Japan's financial system as possibly more exposed to overseas markets and funds than before.

Even after September's increase, the policy rate sits below core inflation. In real terms, money in Japan still costs borrowers less than nothing, and fuel subsidies hide part of the price rise from consumers.