Core Inflation in Japan Defines the Next Move of the Central Bank

LiquidityWizard · 2026-01-31T08:05:57+00:00

The Bank of Japan faces a critical moment in its monetary policy as core inflation could force a reassessment of its strategy in the face of a potential decline in overall inflation. Attention is focused on how this core inflation will behave and its relationship with wage growth and government stimulus measures, influencing the bank's future decisions.

LiquidityWizard

2026-01-31 08:05:57

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The Bank of Japan is at a critical crossroads. As December’s Consumer Price Index data prepares to be released, ING analysts anticipate a scenario where the trajectory of core inflation could completely reshape the monetary policy strategy for the coming months. The interest rate decision on Friday will be more than just a numbers confirmation; it will be a turning point in how Tokyo addresses its persistent inflation challenge.

Expectations of Moderation in Consumer Prices

Overall inflation is expected to show a significant decline in December data, which could pressure the Bank of Japan to reconsider its rate hike plans. However, analysts warn that not everything depends on the headline numbers. The real key will be observing how core inflation behaves, the indicator that filters out the most volatile components and provides a clearer view of Japan’s structural inflation pressures.

Core Inflation as a Monetary Policy Compass

Why are traders so focused on core inflation? Because this indicator filters out noise and reveals the true price dynamics. According to ING analyses cited by Odaily, robust wage growth and government stimulus initiatives will keep core inflation above the 2% threshold that the central bank considers its target. This persistence is crucial: as long as core inflation remains above overall inflation, the Bank of Japan will have justification to continue its monetary tightening cycle.

Bank of Japan Outlook Towards the Second Half of 2026

Once Tokyo confirms that core inflation will consistently stay above 2% and remain above total inflation, it is likely to intensify its restrictive policy actions sometime in the second half of 2026. The central bank is watching two signals simultaneously: the strength of the labor market, reflected in sustained wage growth, and the effectiveness of government fiscal supports. Both variables feed the engine of core inflation, shaping the next moves of the Japanese regulator.

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