Core inflation in Japan fell below the 3% mark in September for the first time in more than a year. Still, it was above the central bank’s target, maintaining hopes that ultra-easy monetary policy would eventually be phased out.

When the Bank of Japan (BOJ) releases new quarterly growth and price estimates during its two-day policy meeting that ends on October 31, the data will be one of several signs that the BOJ will examine.

Although inflation declined in September, Marcel Thieliant, director of Asia-Pacific at Capital Economics, predicted it would only go below the BoJ’s 2% target by the end of the year.

According to official statistics released on Friday, the core consumer price index (CPI), which excludes volatile fresh food costs, increased 2.8% from a year earlier in September, slightly above the median market prediction of 2.7% but slowing from 3.1% in August. According to the report, utility expenses decreased due to historical oil price declines, which helped inflation drop below 3% for the first time since August 2022.

Food and daily need price increases persisted but slowed down from August, indicating that cost-push pressures were reducing.

The core-core index, which the BOJ closely monitors as a better indicator of trend inflation and strips out fresh food and fuel expenses, is up 4.2% from a year earlier in September, easing from an increase of 4.3% in August.

Although inflation is anticipated to decline in the coming months, Shinke Yoshiki, chief economist of the Dai-ichi Life Research Institute, warned that a resurgence in oil prices and continued yen declines might force businesses to boost prices once again.

Core inflation may not fall below 2% until the second half of 2024, he added, adding that there is “strong uncertainty” on the predicted rate of decreases in inflation. In reaction to rising inflationary pressure, the market speculates that the BOJ will soon abandon negative short-term interest rates and yield curve control, which caps the yield on the 10-year bond at 0%.

The BOJ has downplayed the likelihood of gradually ending its enormous stimulus program, stating that before it can contemplate raising interest rates, recent cost-driven price hikes must turn into demand-driven increases in inflation.

According to two individuals familiar with the BOJ’s thinking, improving its inflation projections alone won’t force it to gradually reduce stimulus since officials are more concerned with whether wages will increase sufficiently to support consumption. As inflation-adjusted real earnings continue to decline, there are increasing indications that consumers feel pressure from price increases.

Some BOJ regional branch managers stated at a quarterly meeting on Thursday that shoppers are becoming more price-conscious and purchasing fewer products at supermarkets. A government poll of businesses in the service sector, including restaurants, taxi drivers, and other businesses, revealed that consumer confidence was shaky in September.

Although businesses this year gave salary rises not seen in thirty years, economists believe the main question for policymakers is whether the trend will continue in 2019 and extend to smaller businesses nationwide. According to a Reuters poll, core consumer inflation in Tokyo, the capital of Japan, which is seen as a leading indication of national data, is predicted to remain stable at 2.5% in October. On October 27, the Tokyo CPI data is expected.