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The Bank of Japan (BOJ) opted to keep its key interest rates unchanged at its September monetary policy meeting, maintaining the short-term policy rate at -0.1% and the 10-year government bond yield target around 0%. The decision, widely anticipated by financial markets, underscored the central bank’s cautious approach to unwinding its decades-long ultra-loose monetary policy. However, in a notable shift from its usual dovish rhetoric, the BOJ’s post-meeting statement and subsequent comments by Governor Kazuo Ueda hinted that a sustained rise in inflation and robust economic growth could pave the way for a rate hike—marking a potential turning point in Japan’s monetary policy trajectory.

A Decade of Ultra-Loose Policy: The Context

For over a decade, Japan has stood out among major economies for its aggressive monetary easing. Since 2013, under the “Abenomics” framework, the BOJ has deployed a combination of negative interest rates, large-scale asset purchases, and yield curve control to combat chronic deflation and stimulate economic growth. These policies were designed to push inflation toward a 2% target, a goal that long remained elusive as Japan grappled with stagnant wages, weak consumer demand, and a shrinking population.

However, 2023 and 2024 have brought significant shifts. After years of hovering near zero, Japan’s core inflation (excluding fresh food) has exceeded the BOJ’s 2% target for eight consecutive months, reaching 3.1% in August 2024—the highest level in over three decades. While much of this initial uptick was driven by global supply chain disruptions, rising energy prices, and a weak yen (which inflated import costs), a more encouraging trend has emerged: domestic demand-driven inflation is gaining traction.

Service prices, a key indicator of domestically generated inflation, rose 2.7% year-on-year in August, up from 1.8% in January. This increase reflects growing consumer confidence and a gradual recovery in sectors like tourism, dining, and retail, which were battered by the COVID-19 pandemic. More critically, wage growth—long a missing piece in Japan’s economic puzzle—has finally accelerated. Major corporations, including Toyota, Sony, and Panasonic, agreed to average wage hikes of 4.

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