Japan shifting to wage-driven inflation phase, finance minister says

Japan's economy is experiencing price increases driven by higher import costs, signaling a shift towards a sustained inflation phase fueled by rising wages, according to Finance Minister Satsuki Katayama. The government has scheduled a consumption tax cut and payouts to alleviate the strain on households from escalating living costs, Katayama stated to Parliament.

The government and the Bank of Japan are discussing various approaches to address the situation, with Katayama affirming that there is no contradiction between the government's tax cut plan and the central bank's efforts to combat inflation with interest rate hikes. The Bank of Japan recently raised interest rates to a 31-year high of 1.25% in September due to factors such as the Iran war-induced energy shock, strong global demand for artificial intelligence, and higher import costs resulting from a weak yen, raising the risk of underlying inflation surpassing its 2% target.

To prepare for the tax cut, the Prime Minister's administration intends to reduce an 8% consumption tax rate on food items by two years, starting in April 2027. While tax cuts typically stimulate demand and can contribute to inflation, Katayama emphasized that the government's responsible and proactive fiscal policy aims to enhance Japan's supply capacity without exacerbating inflation.