Japan Core CPI Eases to 1.7% in August 2026

Japan’s nationwide consumer price index for August 2026 showed headline CPI unchanged at 1.9% year on year for the second consecutive month, while core CPI (excluding fresh food) eased modestly from 1.8% in the previous month to 1.7%. Core CPI has remained below the Bank of Japan’s 2% price stability target for eight consecutive months since January 2026. Meanwhile, the BOJ’s corporate goods price index (CGPI) has risen by more than 7% over the past year, indicating that upstream price pressures are, if anything, accelerating again. Year-on-year deceleration and stronger recent momentum in index-level terms are occurring simultaneously, creating a two-tiered price environment that is difficult to characterize simply as “slowing.”

Three CPI Measures: Headline CPI Holds at 1.9% as Core-Core CPI Remains Above Core CPI

In August, all three CPI measures converged within a range of 1.7–1.9%, indicating that the deceleration from the 3% range seen a year earlier has reached a pause. According to the Statistics Bureau of Japan (MIC), the headline index was 102.2 (2025=100), up 0.2 points from 102.0 in the previous month.

All figures are year-over-year (%).

The ranking of the three measures was headline CPI at 1.9%, core-core CPI at 1.9%, and core CPI at 1.7%. Two contributions can be separated from this pattern.

• Headline CPI exceeded core CPI by 0.2 percentage points: fresh food pushed up headline inflation
• Core-core CPI exceeded core CPI by 0.2 percentage points: energy pulled down headline inflation

The trend in the gap between core-core CPI and core CPI is particularly noteworthy. The gap, which stood at 0.7 percentage points in March 2026, narrowed to 0.1 points in June and July before widening to 0.2 points in August. This means that the downward contribution from energy has been diminishing. Conversely, the main reason core CPI remains below 2% is the temporary factor of year-on-year declines in energy prices; once that effect fades, core CPI could converge toward the core-core CPI level of 1.9%.

Two competing interpretations are possible. One is that underlying inflation is below target because core CPI has fallen to 1.7%. The other is that, as long as core-core CPI remains above core CPI, underlying inflation excluding food and energy is relatively firm. The latter interpretation is supported by two points. First, core-core CPI has remained within a range of 1.7–1.9% without falling below the lower bound, moving from 1.9% in April to 1.9% in August. Second, the trimmed mean, discussed below, has remained above core CPI.

Service Prices: Restaurant Prices Reaccelerate While Recreation Services Trail Headline CPI

Price pass-through in the services sector is clearly diverging by category. The pattern becomes visible when measured as the gap from headline CPI.

The table shows that restaurants were a prominent pass-through category at the end of 2025, with prices approximately 2 percentage points above headline CPI, but that advantage has narrowed to 0.2 points recently. Nevertheless, restaurant inflation itself reaccelerated from 1.7% year on year in July to 2.1% in August, indicating that pass-through pressure from raw-material and labor costs has not disappeared.

By contrast, recreation services slowed from 1.3% to 1.1%, placing them 0.8 points below headline CPI. In leisure-related categories, price pass-through has not kept pace with overall inflation. Because households purchase restaurant services frequently, the persistence of high restaurant inflation means that perceived inflation may remain higher than the headline CPI rate of 1.9%. At the same time, the slowdown in recreation services suggests weak demand in discretionary spending categories, raising the possibility that households are adjusting to declining real purchasing power by restraining selective expenditures.

Distance from the BOJ’s 2% Target: Within the Target Range Excluding Energy Factors

The gap between core CPI at 1.7% and the 2% price stability target is 0.3 percentage points, slightly wider than the 0.2-point gap in July. From a policy perspective, however, the nature of this gap cannot be described simply as a failure to achieve the target.

Since January 2026, core CPI has remained in a range of 1.4–1.9%, with the largest downside gap from 2% being 0.6 points. Compared with the 1-point upside gap represented by the 3.0% rate in October and November 2025, inflation has converged toward the target. Moreover, the downward contribution from energy responsible for the current gap has narrowed to approximately 0.2 points. Once the year-on-year decline in energy prices has run its course, core CPI should mechanically return to around 2%.

The policy implication is that it is difficult to draw a straightforward conclusion that policy should remain accommodative simply because inflation is below target. With CGPI reaccelerating and the trimmed mean above 2%, it is difficult to base policy solely on the core CPI reading of 1.7%. The two key indicators to watch are whether core-core CPI maintains its 1.9% range floor and whether core CPI returns to the 1.8% range from September onward as the energy contribution fades.

Underlying Inflation: The 2.3% Trimmed Mean Exceeds Core CPI

The BOJ’s measures of underlying inflation indicate a higher price trend than core CPI. According to BOJ statistics, the trimmed mean was 2.3% in July, 0.5 percentage points above that month’s core CPI of 1.8%. After rising to 2.7% in April, the trimmed mean declined gradually to 2.6% in May, 2.6% in June, and 2.3% in July, but it remains above 2%.

The mechanism behind this gap is clear. The trimmed mean is a weighted average calculated after excluding the top and bottom 10% of the distribution of year-on-year changes by CPI item. This removes both sharply declining items, such as energy, at the lower end of the distribution and some rapidly rising items at the upper end. Thus, while a substantial year-on-year decline in energy prices is reflected in core CPI, it is excluded from the trimmed mean. The fact that the trimmed mean exceeds core CPI means that price increases of more than 2% are continuing among the middle group of items after energy outliers have been removed.

The relationship with the mode is also informative. The mode was 2.0% in July, up from 1.7–1.8% between January and June. The fact that the 2.3% trimmed mean exceeds the 2.0% mode indicates that the distribution is skewed upward, with a somewhat thicker tail of items experiencing substantial price increases. However, the skew is modest at approximately 0.3 points, suggesting that price revisions have become distributed across a broad range of items rather than being concentrated in a few outliers. The rise in the mode means that the rate of price revision around which the largest number of items is clustered has itself reached 2%, making it more important than the slowdown in core CPI from the perspective of the stability of underlying inflation.

The weighted median and the share of rising items are missing from the available data, so no direct measure of the breadth of price increases is available this month. Based on the rise in the mode and the trimmed mean remaining above 2%, there is no evidence that breadth has deteriorated rapidly.

Price Pass-Through Structure: CGPI Rises Over 7% Year on Year as Upstream and Downstream Momentum Diverge

Upstream prices are accelerating again. According to BOJ statistics, the corporate goods price index rose from 126.5 to 136.1 (2020=100) over the latest 13-month period, equivalent to an increase of approximately 7.6% year on year. Within the series, the cumulative increase over the first five months was limited to around 1.7 points, whereas the latest six monthly changes were +1.4, +3.6, +1.5, +0.7, +0.6, and -0.3. The index therefore fluctuated considerably, including two consecutive months of increases exceeding 1 point. The latest month recorded a modest decline of 0.3 points, suggesting that the sharp acceleration has temporarily eased.

It is important to distinguish the structures of CGPI and CPI. CGPI covers goods traded between businesses and includes the weight of imported goods, whereas CPI covers both goods and services purchased by households. Because their coverage and composition differ, the gap between CGPI in the 7% range and CPI at 1.9% can exist structurally even under normal conditions; it cannot in itself be interpreted as a transformation of the price structure. What matters is the direction of change.

Against this backdrop, one finding is especially important. The year-on-year increase in CPI rose only modestly from 1.5% in March to 1.9% in August, but in index-level terms the CPI increased from 100.6 in March to 102.2 in August, an increase of approximately 1.6% over five months. By contrast, the index was almost flat over the five months from September 2025 to February 2026, moving from 100.1 to 100.2. In other words, the low and stable year-on-year rate reflects a base effect, namely the high comparison base in the 3% range during autumn 2025, while recent CPI momentum is actually accelerating. This acceleration in monthly momentum occurred several months after the sharp rise in CGPI, consistent with a pass-through channel from upstream to downstream prices operating with a lag.

Upstream prices in services are also rising. The BOJ’s services producer price index (SPPI) increased from 111.3 in the first month of the series to 115.1 in July 2026, a 3.4% rise over 11 months. Although this is below the increase in CGPI, the rise in SPPI indicates that the pass-through of service costs, including labor costs, is advancing at the business-to-business transaction stage. The increase in SPPI has a channel through which it can spill over, with a time lag, into CPI service categories such as restaurants and recreation. This is consistent with the reacceleration in restaurant inflation in August.

The available data contain no direct information on corporate profit rates or margins, so the extent to which companies can absorb costs cannot be assessed definitively. The observable fact is a parallel time-series relationship: while CGPI rose sharply from March to May 2026, core-core CPI declined year on year from 2.4% to 1.8%. This suggests that upstream cost increases were not fully reflected in downstream prices during the same period, and indicates that CPI’s month-on-month pace could strengthen if pass-through advances.

Link to the Real Economy: All Three Business Cycle Indicators Improve

Business cycle indicators point to a real-economy environment in which price increases are relatively easy to accommodate. According to the Cabinet Office, the July 2026 leading index was 117.9, up from 116.2 in the previous month; the coincident index was 120.6, up from 118.9; and the lagging index was 113.3, up from 111.7. All three rose month on month.

The coincident index in particular rose 6.6 points from 114.0 in August 2025 to 120.6 in July, indicating that the economy remains in an expansion phase. The lagging index also reversed upward, rising to 113.3 in July from a low of 111.3 in May 2026. Because the lagging index reflects subsequent adjustments in employment and capacity utilization, its reversal may indicate that the economic expansion is beginning to spread to corporate hiring and investment decisions.

The implication is important. When supply and demand are moving toward tighter conditions, corporate price revisions are less likely to cause a decline in demand, making price pass-through easier. The acceleration in CPI’s monthly momentum and the improvement in business cycle indicators are not contradictory; rather, they form a consistent combination. The industrial production index is not included in this month’s data, so evidence from the production side is assessed using the coincident business cycle index instead.

Corporate Sentiment: Large Manufacturers’ DI Improves to 22, While Assumed Exchange Rates Move Toward Yen Depreciation

The BOJ Tankan survey indicates that the corporate pricing environment is favorable, although caution remains about the outlook. In Q2 2026, the business conditions DI improved across company sizes: large manufacturers rose to 22 from 17 in Q1, large nonmanufacturers to 37 from 36, and small and medium-sized manufacturers to 9 from 7.

However, outlook readings were substantially lower than current conditions: large manufacturers were at 14, down 8 points from the recent 22, while large nonmanufacturers were at 29, down 8 points from 37. Companies appear to view their current favorable conditions as temporary.

More important for inflation analysis is the assumed exchange rate. The assumed USD/JPY rate for all industries and company sizes was revised from 145.68 in Q3 2025 to 152.57 in Q2 2026, a yen depreciation of approximately 6.9 yen over four quarters. A weaker-yen revision to the assumed exchange rate means that companies are formulating business plans on the premise of higher import costs. This is directionally consistent with CGPI inflation above 7% and supports the view among companies that upstream cost pressures will persist for the time being.

A simultaneous improvement in the DI and yen depreciation in assumed exchange rates creates an environment in which companies can more easily pass higher costs on to prices. The improvement in the small and medium-sized manufacturers’ DI from 1 in Q3 2025 to 9 indicates that even companies with limited pass-through capacity are gaining some room to raise prices.

Decomposing Supply and Demand Factors: Supply-Side Pressures Lead, While Demand-Side Evidence Is Limited

This month’s inflation picture is clearly led by supply-side, or cost-push, factors.

• Supply side: CGPI inflation of approximately 7.6%, an SPPI increase of 3.4% over 11 months, and a weaker-yen revision to the assumed exchange rate all indicate rising costs through three separate channels
• Supply side (actual trade): According to Ministry of Finance trade statistics, imports in December 2025 totaled ¥10.3129 trillion, up ¥910.0 billion from ¥9.4029 trillion in November. The trade balance was a surplus of ¥94.8 billion, but this was down from ¥306.0 billion in November
• Demand side: The retail sales data from METI’s Current Survey of Commerce extend only to January 2025, when sales were ¥12.7280 trillion, up 4.4% year on year, leaving a substantial time gap from the month under analysis

The increase in import value means that the amount of input entering the cost-push channel from CGPI to CPI has itself expanded. However, trade data are available only through December 2025 and retail sales data only through January 2025, so supply and demand conditions in August cannot be compared on a contemporaneous basis. Given this limitation, direct confirmation of demand-pull inflationary pressure is limited.

Alternatively, using the improvement in the coincident and lagging business cycle indexes discussed in the previous section as indirect evidence on the demand side, the most consistent decomposition is that supply-side cost increases are becoming easier to pass through because of firm demand conditions. From the household perspective, a 1.9% rise in headline CPI reduces real purchasing power unless nominal income grows at least as quickly. Recreation services running 0.8 points below headline CPI may indicate that households are responding to price revisions by restraining discretionary spending, an early sign that constraints on real purchasing power are beginning to appear on the demand side.

Market Reaction: TOPIX Corrects from the 4,180s at the Start of September to the 4,090s

The equity market showed limited upside momentum from late August into September. TOPIX rose from 4,067.29 on August 21 to 4,181.86 on September 1, but fell 2.40% on September 2 and another 1.83% on September 8, reaching 4,028.30 on September 11. It subsequently rebounded, closing at 4,094.19 on September 17.

The rise in late August was consistent with the improvement in the business conditions DI and the expansion indicated by the business cycle indexes. The two declines of more than 1% in early September were consistent with an environment in which conflicting factors coexist for corporate earnings: CPI inflation remained flat at 1.9%, while CGPI stayed elevated. When costs continue to rise but CPI inflation remains below 2%, concerns about pressure on earnings are likely to be reflected in share prices.

The closing level of 4,094.19 on the final trading day was approximately 2.1% below the period high but remained above the starting point. The market does not appear to regard the price environment as fundamentally destabilizing, but it has priced in uncertainty over the success of price pass-through.

Outlook: Core CPI Could Return Toward 2% as the Base Effect Fades

The central conclusion from this month’s data is that the slowdown in year-on-year inflation does not represent a slowdown in underlying momentum. The evidence can be summarized in three points.

• The CPI index rose approximately 1.6% over the five months from 100.6 in March 2026 to 102.2 in August, with momentum clearly accelerating from the near-flat performance during the first five months
• The trimmed mean was 2.3% in July, 0.5 points above core CPI, while the mode also rose to 2.0%
• CGPI was up approximately 7.6% year on year, and SPPI also remained on an upward trend, indicating continuing upstream cost pressures

For monetary policy, it is important that the core CPI reading of 1.7% alone is insufficient as a basis for judgment. Once the downward contribution from energy, represented by the 0.2-point gap between core-core CPI and core CPI, fades and the high comparison base in the 3% range during autumn 2025 passes out of the calculation, core CPI should mechanically return toward 2%. As long as the BOJ maintains its framework of emphasizing underlying inflation, the trimmed mean remaining above 2% supports the direction of policy normalization.

For households, assuming the 1.9% increase in headline prices continues, spending patterns are likely to become more polarized. The gap between frequently purchased categories such as restaurants, where price inflation exceeds headline CPI, and categories such as recreation services, where inflation is below headline CPI, is approaching 1 percentage point. Perceived inflation is likely to remain higher than the statistical rate.

The three specific points to watch are as follows. First, whether core CPI returns to at least the 1.8% range from September onward as the energy contribution fades. Second, whether the latest month’s month-on-month decline of 0.3 in CGPI represents a temporary adjustment or the beginning of a peak in upstream cost pressures. Third, whether the renewed acceleration in restaurant inflation, from 1.7% to 2.1%, becomes established as a pass-through effect from rising SPPI. If these developments are confirmed, inflation in the second half of 2026 will move closer to a scenario of stability around 2%.

Glossary

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This column was automatically generated by AI integrating e-Stat public statistics (Consumer Price Index), Bank of Japan statistics, and market data as a price trend analysis resource. This is not a recommendation to buy or sell any financial instruments. Please make investment decisions at your own responsibility and consult professionals as needed.