Japan’s consumer prices increased for the ninth straight month in September. However, the markets see the rise in inflation as sluggish, since it is still far from Bank of Japan’s (BOJ) 2% target. In response, BOJ kept its monetary policy steady (read: Japan ETFs in Focus as Shinzo Abe Wins).

Economic Data

Core inflation, which excludes volatile items such as fresh food, grew 0.7% year over year, still far from BOJ’s 2% target. The rise was driven by a surge in energy prices.

Japan’s economy grew an annualized 2.5% in the second quarter compared with preliminary estimates of a 4% expansion. The International Monetary Fund upgraded its forecast for Japan’s growth rate to 1.5% for 2017 compared with its July forecast of 1.3% expansion as exports gain momentum (read: Japan ETFs in focus as Nikkei soars).

In its latest policy meeting, BOJ maintained its short-term interest rate at -0.1% and kept its stimulus measure intact, as inflation still remains moderate in the Japanese economy. This is in stark contrast to its developed peers like the United States and European countries, which have already begun setting policies to wind down their stimulus.

The BOJ maintained its expected inflation at 1.8% for fiscal 2018-2019 and 2% for fiscal 2019-2020. However, it lowered its core inflation forecast for fiscal 2017-2018 to 0.8% compared with its previous forecast of 1.1%.

Risks Involved

Although the Federal Reserve is widely expected to hike rates in its December policy meeting, there still remains some uncertainty regarding the future course Fed policies will take. This is primarily because of the uncertainty surrounding the next Fed chair. A rate hike will lead to a rally in the greenback against the yen, which in turn will be beneficial for Japanese exporters.

President Donald Trump is expected to announce his decision on the Fed chair this week. Although markets believe dovish Fed governor Jerome Powell is likely to replace Janet Yellen, the uncertainty clouds the outlook for the yen.