Japan’s core inflation rate held steady at 3% in November, remaining above the Bank of Japan’s 2% target for the 44th consecutive month and strengthening expectations for an imminent interest rate hike—the first since 1995. The data arrives as the BOJ concludes a pivotal two-day policy meeting, with economists anticipating a cautious move to normalize monetary policy amid a fragile economic backdrop.

The so-called “core-core” inflation rate, which excludes both food and energy, edged down to 3% from 3.1%. Notably, rice inflation slowed for the sixth straight month to 37.1%, down from a May peak when prices had more than doubled year-on-year—the sharpest increase in over five decades.

Balancing Inflation Control with Growth Risks

While inflation persists, the BOJ faces a delicate balancing act. Revised GDP figures show Japan’s economy shrank more than initially estimated in the third quarter, contracting 0.6% quarter-on-quarter and 2.3% annualized. This raises the risk that higher rates could further dampen growth.

Prime Minister Sanae Takaichi has advocated for proactive fiscal spending over excessive tightening, urging a growth-focused approach to boost tax revenues. Meanwhile, BOJ Deputy Governor Masazumi Wakatabe emphasized that structural reforms and fiscal stimulus should lift Japan’s neutral interest rate—estimated between 1% and 2.5%—before the central bank aggressively tightens policy.

“If Japan’s neutral rate rises as a result, it would be natural for the BOJ to raise interest rates,” Wakatabe said, cautioning against premature or excessive withdrawal of monetary support.

Market Reactions and the Yen’s Path

Following the data, the yen strengthened slightly to 155.53 against the dollar, while the Nikkei 225 rose 0.69%. Ten-year Japanese government bond yields dipped marginally to 1.957%, remaining near multi-decade highs as the yield gap with global peers narrows.

Oxford Economics’ Shigeto Nagai expects core-core inflation to slow and stabilize around 2% by mid-2026 as supply-driven food price pressures fade. However, he warned that prolonged cost-push inflation from additional supply shocks or yen depreciation poses a “major risk.”

For the BOJ, today’s decision will signal how it intends to navigate the diverging pressures of persistent inflation and economic contraction. A rate hike would mark a historic shift away from decades of ultra-loose policy, but its trajectory thereafter will hinge on whether fiscal and growth strategies can sustainably lift Japan’s economic potential.