TOKYO - The Bank of Japan has declared that Japan's underlying inflation rate has reached its long-standing 2% target, marking a milestone in its effort to overcome decades of deflation, even as consumers continue to struggle with food prices rising far faster than the central bank's benchmark.
The announcement, made in late October, comes as another wave of price increases takes effect in November, with 1,477 food and beverage products becoming more expensive this month, according to research firm Teikoku Databank. The average increase across those products is 17%, highlighting the growing gap between the Bank of Japan's assessment of inflation and the financial pressures experienced by households.
The central bank introduced its 2% inflation target in 2013 as part of an effort to break Japan's long-running cycle of stagnant prices and wages. For years, weak consumer demand, limited wage growth and corporate reluctance to raise prices reinforced one another, preventing the economy from achieving sustained inflation.
Although the Bank of Japan now considers underlying inflation to have reached approximately 2%, the broader consumer price index tells a different story.
Japan's consumer prices rose 3.2% in 2025 compared with the previous year, while food prices climbed 6.8%, more than three times the central bank's target. For households facing higher grocery bills, the distinction between overall inflation and the underlying trend may seem difficult to reconcile.
The latest increases are particularly concentrated in seasonings and condiments, which account for the largest share of products becoming more expensive in November.
Food manufacturer Kewpie announced price increases of approximately 3% to 25% across 224 products shipped from November 1. Its flagship 450-gram Kewpie Mayonnaise, for example, has risen from 517 yen to 565 yen, an increase of approximately 9.3%.
These increases illustrate why many consumers remain skeptical of the central bank's declaration that inflation has reached 2%, particularly when the prices of everyday necessities are rising at substantially higher rates.
The explanation lies in the different measures of inflation being used.
Rather than relying exclusively on the consumer price index, the Bank of Japan evaluates what it calls the "underlying inflation rate," which seeks to identify the economy's more persistent price trends by excluding temporary influences.
These influences include weather-related fluctuations, short-term government subsidies and other factors expected to disappear over time. Developments in the Middle East, changes in energy prices and movements in the price of naphtha, a petroleum-derived raw material widely used in chemical manufacturing, are also assessed to determine whether their effects are temporary or likely to persist.
The central bank's approach aims to capture the underlying strength of inflation rather than temporary fluctuations that may distort the broader price picture.
Unlike the consumer price index, however, underlying inflation is not a single statistical measure that can be calculated directly from a fixed set of figures.
Instead, the Bank of Japan makes a comprehensive assessment using multiple indicators, including expectations among households and businesses about future price increases, as well as the extent to which particular cost pressures are likely to continue.
This introduces an element of judgment into the central bank's assessment, although decisions are not made by an individual official.
The Bank of Japan's nine Policy Board members evaluate economic conditions at monetary policy meetings, bringing together their assessments of inflation, wages and broader economic developments.
Governor Kazuo Ueda said at a recent press conference that all nine members agreed with the latest assessment, indicating a consensus that underlying inflation has broadly reached the 2% level.
The distinction is important because achieving 2% inflation has never been intended simply to make goods and services more expensive.
The central bank's objective is to establish a sustainable cycle in which higher prices support corporate revenues, companies use those revenues to increase wages, and stronger household incomes encourage additional consumption.
In such a cycle, rising wages and consumer spending reinforce economic growth, allowing businesses to maintain profits and continue investing and hiring.
This is often described as a virtuous cycle of inflation, in contrast to price increases driven primarily by rising import costs or shortages.
For Japanese companies, the ability to raise prices has become increasingly important after decades in which businesses frequently absorbed higher costs rather than passing them on to customers.
When inflation remained close to zero, companies were reluctant to increase prices for fear of losing customers. This constrained revenue growth and limited the resources available for wage increases.
A more inflationary environment has made it easier for businesses to pass higher production and distribution costs on to consumers, potentially creating more room to raise employee pay.
From this perspective, the shift away from near-zero inflation represents progress for Japan's economy.
However, higher prices do not automatically translate into improved living standards.
Much of Japan's recent inflation has been influenced by external pressures, including higher energy costs associated with Russia's invasion of Ukraine and instability in the Middle East.
Such increases can weaken household purchasing power without generating a corresponding rise in domestic economic activity.
When businesses face higher costs for imported oil, raw materials and other essential inputs, price increases may simply compensate for additional expenses rather than provide the financial resources needed for wage growth.
For inflation to become genuinely beneficial, wages must continue rising alongside prices, allowing household purchasing power to recover and consumption to strengthen.
Japan has made progress toward establishing this relationship, but the transition remains incomplete.
The yen's weakness is another significant factor contributing to higher living costs.
Because Japan depends heavily on imports for energy, food ingredients and industrial materials, a weaker currency increases the yen-denominated cost of overseas purchases.
These costs can eventually be reflected in retail prices, adding pressure to household budgets even when domestic demand remains relatively subdued.
The difference between Japanese and U.S. interest rates has been an important influence on currency movements, encouraging investors to favor dollar-denominated assets when American yields are higher.
This has raised questions about whether the Bank of Japan should increase interest rates more quickly to narrow the interest-rate gap and help contain imported inflation.
With the U.S. Federal Reserve holding off on a further rate increase, an additional rate increase by the Bank of Japan could potentially have narrowed the difference between the two countries' borrowing costs, supporting the yen and easing some of the pressure on import prices.
However, the central bank has chosen a more cautious approach.
Its primary responsibility is to maintain price stability, and policymakers must weigh the potential benefits of a stronger yen against the broader economic consequences of higher borrowing costs.
Raising rates too quickly could increase the burden on households with loans and mortgages while also raising financing costs for businesses.
An additional concern is whether the full effects of previous rate increases have had sufficient time to work through the economy.
Monetary policy changes typically affect borrowing, investment, employment and consumption gradually, making it difficult to determine their ultimate impact immediately after a decision.
If the Bank of Japan raises rates again before fully assessing the consequences of an earlier increase, it risks tightening financial conditions more than necessary.
This is particularly sensitive in Japan, where the economy is still adjusting to a prolonged period of exceptionally low interest rates.
For businesses, higher borrowing costs could discourage investment or expansion, while households may reduce spending as loan repayments become more expensive.
These risks help explain why the central bank has been reluctant to accelerate monetary tightening solely in response to the recent inflation figures.
The achievement of the 2% underlying inflation target nevertheless represents an important change in Japan's economic policy landscape.
For more than a decade, the Bank of Japan's central challenge was generating enough inflation to escape the persistent weakness in prices and wages that characterized the deflationary economy.
With underlying inflation now assessed to have reached its target, the focus is increasingly shifting toward maintaining price stability while ensuring that economic growth and wage increases remain sustainable.
The challenge is especially pronounced because consumers continue to experience inflation very differently from the central bank's statistical assessment.
A 2% underlying inflation rate may indicate that Japan is approaching a more stable economic environment, but it offers limited immediate relief to households facing food prices that rose 6.8% last year and another round of substantial increases in November.
Whether Japan has truly achieved a healthy inflation cycle will ultimately depend less on the central bank's declaration than on whether wages can consistently keep pace with living costs, allowing households to benefit from the economic transformation policymakers have pursued since 2013.
Source: TBS
