The Bank of Japan (BOJ) is set to hold a meeting later this month, with the market widely expecting the central bank to keep interest rates unchanged. In September, a key inflation indicator in Japan saw its first slowdown in five months.

Data released by Japan's Ministry of Internal Affairs and Communications on October 18 showed that consumer prices, excluding fresh food, rose 2.4% year-on-year, down from 2.8% in August. This change is mainly attributed to government utility subsidies that have mitigated the impact of persistent inflation, with the result slightly higher than the market's expected 2.3%.

The slowdown in price increases largely relies on government subsidies, so without signs of other trends weakening, the impact on the Bank of Japan's policy may be limited.

Hiroki Shinkawa, a senior executive economist at Dai-ichi Life Research Institute, said, "If the subsidies are extended, CPI will fall, but it won't affect the price trend itself, so we don't need to worry too much about these measures. The Bank of Japan's decision is unlikely to change because of this."

The overall inflation rate dropped from 3.0% in August to 2.5%, mainly due to the decline in electricity and gas prices, with government subsidies reducing the inflation rate by 0.55 percentage points. The core index, which excludes energy and fresh food, rose from 2.0% last month to 2.1%. The Bank of Japan considers service prices as a key indicator of price trends, and this index increased by 1.3% compared to the same period last year, down from 1.4% in August.

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The market widely expects the Bank of Japan to maintain the benchmark interest rate at 0.25% on October 31. After the last rate hike in July, the central bank faced criticism, and its communication approach has since been under scrutiny.

The Bank of Japan maintains its stance that if inflation develops as expected, it will further reduce monetary easing and raise interest rates. The central bank's outlook will be updated at the end of the month.

Bloomberg economist Taro Kimura said, "The details of the September CPI report show that consumer price momentum was unexpectedly strong, driven by significant wage increases and a weaker yen, which played a hidden role behind the softening of the overall price index."

If the government's utility subsidies expire as scheduled this month, inflation may accelerate again in the coming months. A report from the Teikoku Databank shows that food companies raised prices for 2,911 products in October.

A weak yen could increase inflationary pressure through import prices. Due to the strong US economy, the yen has weakened against the US dollar in recent weeks, rising to the 150 level again on Thursday evening.At the same time, the upcoming economic stimulus plan may suppress inflation rates, funded by additional budgets larger than last year. Shigeo Ishihara stated that the plan will focus on price relief measures, such as cash distributions to low-income households, to consolidate public support.

The Chief Economist of the Norinchukin Bank, Takeshi Minami, said: "All political parties are proposing spending plans in the election campaign, and I believe that price measures will continue to be implemented no matter what happens."

Japan's inflation rate has remained above the Bank of Japan's 2% target level for the past two and a half years. However, to date, the Shigeo Ishihara government has not announced an exit from deflation and has called for caution regarding the Bank of Japan's interest rate hikes. The new government aims to achieve wage growth that exceeds inflation to help households continue to consume, promoting a virtuous economic cycle.

This year, labor unions have secured the largest wage increases in years, and a long-term labor shortage has also helped to raise workers' salaries. However, after rising in the first two months following inflation adjustments, real wages fell again in August, and consumption remains sluggish.