Japan inflation 2026: the BoJ pivot, yield curve control, and what comes next

It started as bad (cost-push, import-driven) and has become increasingly good (demand-pull, wage-driven). The critical shift came in 2024 when the wage-price cycle turned genuinely domestic: companies raised prices because demand was strong, not just because imported energy was expensive. The 2025–26 Shunto settlements confirm that the domestic wage-price dynamic is real and self-sustaining. The BoJ assesses this quarterly in its Tankan and Outlook Report. The risk is that if global energy prices fall sharply (driven by Chinese demand weakness), the imported component of Japanese inflation falls and the domestic wage spiral may not be strong enough to maintain 2% independently.

When BoJ rates were near zero, global investors borrowed cheaply in yen and invested in higher-yielding assets (US Treasuries, emerging market bonds). This created massive short-yen positions that suppressed the yen exchange rate — contributing to imported inflation as everything priced in dollars became more expensive in yen. As the BoJ raises rates, the carry trade unwinds: the yen appreciates, imported inflation falls. A stronger yen is therefore a natural anti-inflationary force as the BoJ tightens — which reduces the pace of tightening needed. This is the exchange rate channel of monetary transmission, discussed in our monetary tightening glossary entry.