Nikkei Hits New Record as Japan’s Inflation Cools and BOJ Holds Fire for Now

Summary:

Japan’s Nikkei 225 surged to an all-time high for the second day in a row as cooling inflation and upbeat GDP data reinforced expectations that the Bank of Japan will keep rates unchanged at its latest meeting...

Japan's Market Rally Fueled by Soft Inflation and BOJ Patience

The Nikkei 225 closed 1.19% higher, reaching a new record at 45,593.33, as Japan’s August core inflation fell to 2.7%, the lowest since November 2024. This marks the third consecutive month of decline, aligning with economist expectations and reducing pressure on the Bank of Japan to accelerate its rate normalization.

Headline inflation also slipped to 2.7% from 3.1% in July, reinforcing the narrative that price pressures are easing across key consumer sectors including food staples like rice, which saw a sharp deceleration in inflation from July’s alarming 90.7% to 69.7%.

As a result, market consensus, confirmed by a Reuters poll, suggests the BOJ will maintain its benchmark policy rate at 0.5%. However, analysts at HSBC predict a 25 basis point hike in October, citing solid GDP growth and signs of underlying resilience.

Resilient Growth Anchors Market Optimism

Japan’s Q2 GDP surprised to the upside with a 0.3% quarter-on-quarter expansion, compared to the 0.1% expected by analysts. This growth was largely driven by strong exports and a tariff relief deal with the U.S., which lowered duties on Japanese goods from 25% to 15%, reducing trade friction and boosting exporter sentiment.

This combination of lower inflation and robust growth has created a rare “Goldilocks” environment for Japan: inflation is manageable, and economic momentum is sustained, giving policymakers room to maneuver without destabilizing financial markets.

Asia-Pacific Markets Rise, Riding Japan’s Momentum

The Topix index also gained 0.84%, while Australia’s ASX 200 climbed 0.77% to 8,783.50, driven by renewed investor confidence after the U.S. Federal Reserve signaled the beginning of a rate-cut cycle. South Korea’s Kospi and Kosdaq started flat, while Hong Kong’s Hang Seng futures pointed to modest gains at the open, trading at 26,612 versus the previous close of 26,544.85.

Shanghai’s composite was virtually unchanged at 3,831.554, reflecting a cautious stance as investors weigh China’s ongoing property and deflation challenges.

Wall Street Adds Fuel to Asian Risk Appetite

Overnight gains on Wall Street further supported Asian equities. The S&P 500 rose 0.48% to close at 6,631.96, the Nasdaq jumped 0.94% to 22,470.73, and the Dow added 124 points to settle at 46,142.42. All three indexes reached intraday record highs on Thursday, boosted by the Fed’s rate cut and signals of a looser monetary stance in the near term.

Smaller-cap U.S. stocks led the rally, reflecting broader investor confidence in a soft landing scenario. The easing bias from both the Fed and BOJ is fostering a synchronized global optimism that could extend into Q4.

Investor Outlook: Mild Policy, Firm Growth, Upbeat Markets

With Japan’s inflation trajectory easing and no urgent pressure to hike rates, the BOJ has room to remain accommodative in the near term. Meanwhile, the U.S. Fed’s dovish pivot and positive global sentiment are giving Japanese equities a powerful tailwind.

The market will now closely watch the BOJ’s policy statement for any hints of an October hike. Should inflation stabilize below 3% and growth remain firm, further gains in the Nikkei and potentially the yen could materialize as Japan finally begins to move away from its ultra-loose monetary legacy.

Source: CNBC

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