UBS Economics-Japan Economic Comment _Japan Inflation Tracker Outlook for...-119197350

ab5 December 2025Global ResearchJapan Economic CommentJapan Inflation Tracker: Outlook for 2026-2027Disinflation in 2026 with food price stabilizationFood inflation on a year-on-year basis, which accelerated more than expected from mid-2024 and pushed up the headline CPI inflation, finally peaked in July this year and appears to have entered a deceleration phase. We expect this slowdown in food inflation to continue until mid-2026, and primarily as a result, we project core-core CPI　(CPI ex. fresh foods & energy) to decline from 3.0% in CY 2025 average (our estimate) to 2.1% in 2026, with food inflation accounting for -0.8ppt of the total -1.0ppt deceleration.　We expect core-core CPI to temporarily fall below 2% in 2026, however, supported by steadily rising inflation expectations, the anticipated shift of the output gap back into positive territory, and sustained wage growth, we forecast that it will be back to around 2%, reaching 1.9% in 2027 and 2.0% in 2028.However, pace of food disinflation is uncertain, risk skews to the upsideFood disinflation since July has been mainly due to a fall in rice price. Rice inflation fell from a 102%YoY peak in May to 40% in October, driven by base effects. Given that even a large release of government's stockpiled rice did not significantly lower the price, we expect a gradual decline, reaching 0% year-on-year by April next year. Foods other than rice also finally showed a slowdown in October. Our cost index for food manufacturing suggests continued deceleration, but the pace of slowdown remains uncertain, especially with recent JPY depreciation, which poses upside risk to food prices given their high sensitivity to exchange rates.Government policies weigh on service CPI, but underlying trend near 2%We expect the underlying trend in service inflation to remain stable and hover around 2%YoY with fairly high wage growth around 3%. The latest headline service inflation stands at 1.6%, but this reflects a drag from the government’s free high school tuition policy. Excluding this effect, the rate would be 2%. It should be noted that the expected introduction of free tuition for private high schools and free elementary school lunches (not finalized for the latter) by the government will continue to exert downward pressure in fiscal year 2026. We estimate the total impact on the service CPI is 60bp (30bp to core-CPI); as a result, headline service inflation falling below 1.5%. Our wage outlook assumes a slowdown in the 2026 Shunto negotiations (from 3.7% in FY2025 to 3.2% in the base-up), and, as a result, we expect core wages of all employees in the monthly wage statistics to hover at a relatively low level, declining from 2.5% year-to-date in FY2025 to around 2.3%. Consequently, we expect service inflation—excluding the impact of government policies—to remain slightly below 2%. However, from FY2027 onward, as wages accelerate again toward 3%, service inflation should rise to 2%.Core-CPI likely to slo