Bank of Japan can’t declare 2% inflation victory just yet

We now expect underlying inflation to remain above the Bank of Japan’s 2% target for most of 2025 and the Bank to hike rates to 1.25%. However, we believe that it’s too early for the Bank to declare victory in its quest to lift inflation sustainably to 2%. Consumer price gains in Japan remain driven by goods rather than services to a far larger extent than elsewhere as prices of public services and rents are barely rising. Further progress needs to be made for the policy rate to reach our long-run forecast of 2%.