Bank of Japan's Inflation Strategy Under Scrutiny as Messaging Grows Murkier

 Tokyo, June 29 – Amid persistent headline inflation and global economic uncertainty, the Bank of Japan (BOJ) finds itself navigating a delicate policy landscape, relying increasingly on the less tangible concept of "underlying inflation" to guide its monetary stance—raising questions about transparency and coherence in its communication.

Although headline inflation in Japan remains elevated—April’s consumer price index reached 3.6%, second only to the UK among G7 economies—BOJ officials continue to emphasize caution, citing still-muted domestic demand and wages. The central bank’s preferred inflation measures, such as the "core-core" index (excluding fresh food and fuel), have exceeded the 2% target for nearly three years, yet the BOJ remains reluctant to commit to a path of steady rate hikes.

At the heart of the BOJ’s strategy is a nuanced and, to some, opaque interpretation of inflation trends. Governor Kazuo Ueda acknowledged the challenge of both resetting and re-anchoring inflation expectations during a speech last month. “We have managed to de-anchor expectations from zero, but have yet to re-anchor them at 2%,” he said, underscoring the central bank’s continued commitment to an accommodative policy.

The BOJ’s use of terms like “underlying inflation”—a metric not uniformly defined—has further complicated the bank's policy messaging. Former BOJ official Nobuyasu Atago, now chief economist at Rakuten Securities Economic Research Institute, said: “The unprecedented nature of what the BOJ is doing, and a lack of track record anchoring inflation expectations, are reasons why the BOJ is using the fuzzy concept of underlying inflation. That’s complicating its communication and making it difficult to understand what exactly they are trying to do.”

To gauge underlying inflation, the BOJ looks beyond headline figures to alternative indicators such as the weighted median, the mode, services price inflation, and medium- to long-term expectations. Many of these currently sit below the 2% benchmark. For instance, services inflation registered just 1.4% in May, while inflation expectations hover between 1.5% and 2.0%.

This growing divergence between headline and underlying inflation—coupled with concerns about slowing global growth and domestic consumption—has prompted the BOJ to pause its tightening cycle after raising rates to 0.5% in January, its first hike in years.

Yet not all policymakers are aligned. BOJ board member Naoki Tamura, seen as a proponent of further tightening, voiced frustration with the bank’s dovish approach. “I personally believe focus should be placed on inflation expectations of firms and households, who are the actual drivers of economic activity,” Tamura said this week. “I take these expectations to have already reached around 2%. If upward inflation risks heighten, the BOJ may need to act decisively as a guardian of price stability.”

Internally, the central bank faces divisions over the direction and pace of future rate moves. A Reuters poll of economists showed a slight majority anticipating the next 25-basis-point hike will occur in early 2026.

Meanwhile, households remain focused on the immediate pressures of food and energy prices—factors not fully captured in the BOJ’s narrower inflation metrics. “For the average household, what matters is the price of food and grocery, not fuzzy concepts like underlying inflation,” said a source familiar with the central bank’s deliberations.

Looking ahead, the BOJ’s next policy board meeting, scheduled for July 30–31, is expected to be pivotal. Persistently high food prices and continued geopolitical tensions in the Middle East may force an upward revision of the bank’s inflation forecasts, further testing its cautious approach and communication strategy.

As the BOJ attempts to strike a balance between economic stimulus and inflation containment, its reliance on ambiguous inflation gauges could risk eroding market and public confidence—a scenario its critics warn may leave Japan’s central bank behind the curve.