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As of September 2025, Japan’s inflation profile remains dominated by food price dynamics. The headline 2.9% YoY reading reflects a disproportionate rice contribution—despite representing only 0.62% of the CPI basket, rice added 150–170 bps through its 49.2% YoY surge following the poor 2024 harvest.

Turnleaf’s model projects Japan’s headline CPI inflation to decline steadily through 2026, falling below the Bank of Japan’s 2% target by mid-2026 and stabilizing around 1.0–1.5% by year-end (Figure 1), below street consensus forecasts of 2%. The forecast shows headline inflation dropping from September 2025’s 2.9% to approximately 2.0% by Q1 2026, then continuing to decline toward 1.0-1.5% through Q3-Q4 2026.

Tokyo CPI, released 3–4 weeks ahead of national data, provides early confirmation of these dynamics. The October Tokyo print accelerated, with core at 2.8% YoY, reflecting the fade of temporary water bill subsidies and still-elevated food prices, while services continued to show persistent underlying momentum. Energy turned neutral to slightly negative after subsidy expirations, while housing costs remain subdued due to flexible supply and demographic headwinds. We expect Tokyo CPI to lead our 12-month headline forecast, breaching 2% slightly earlier (Figure 2).

Persistent core pressures from services and wages coexist with a sharper-than-expected disinflation in volatile food categories. Core-core CPI (excluding fresh food and energy) eased to 3.0% in September (from 3.3% in August), remaining historically elevated but reflecting slower sequential gains. The persistence reflects services inflation, underpinned by 2025 Shunto wage settlements averaging 5.46%, the strongest since the 1990s, which firms have partially passed through to consumers for the first time in decades.

Fresh food inflation has collapsed from 15% YoY in mid-2025 to 3–4% by year-end, signaling the mechanical unwinding of the rice shock is already underway and accelerating faster than consensus expects (Figure 3). This 11-12 percentage point decline in just six months creates a mechanical headwind of 100-150 bps to headline inflation through 2026. Rice inflation declining from 49.2% in September toward sub-10% by Q1 2026 will subtract a substantial portion of the 150-170 bps contribution, pulling headline toward 1.5% even before accounting for other disinflationary pressures. Consensus forecasts anchored to 2% underestimate the speed and magnitude of this normalization.

Figure 3

Services Inflation: The “Nigiri Sushi” Indicator

Services CPI has held relatively stable between 1.5–2.0% YoY throughout the surge and subsequent correction in food prices, underscoring that Japan’s core inflation is now structurally anchored near this range, preventing a return to deflation. Within services, labor-intensive dining categories such as nigiri and hand-rolled sushi remain elevated but have entered a clear disinflationary phase. Turnleaf’s high-frequency tracker shows price growth easing from around 8–9% YoY in 2023–24 to roughly 5–6% by late-2025 (Figure 4). The slowdown reflects stabilizing seafood and rice input costs, normalizing household dining demand, and firms absorbing part of wage increases through margins rather than further price adjustments. This pattern underscores a gradual fading of cost-push pressures in labor-intensive services even as absolute prices stay high. In Turnleaf’s model, this “nigiri disinflation” offsets part of the wage-driven stickiness elsewhere in the service sector, reinforcing the downward trajectory of headline inflation toward the 1–1.5% range through 2026.

Figure 4

This moderation, despite historic wage gains, suggests wage-cost pass-through is weakening and that domestic demand conditions cannot sustain broad-based price increases above 2%. The widening divergence between rapidly normalizing food inflation and sticky-but-moderating services implies headline disinflation will mask persistent core pressures, setting up a policy dilemma for the Bank of Japan (BOJ) by Q2 2026, when sub-2% headline inflation coexists with 1.5–2% structural services inflation.

To read the rest, visit Turnleaf’s latest Substack post here.