UBS analysts have revised their inflation forecast for Japan, now expecting higher inflation rates in the coming years. The main reasons are the strengthening US dollar and rising energy prices. In turn, the Japanese yen is doomed for persistent weakness.

In the updated forecast by UBS, USD/JPY is expected to trade at 150 by the end of 2025, up from the previous estimate of 145. This revision reflects the US dollar’s advance.

UBS experts predict a 0.1–0.2 percentage point increase in Japan’s annual CPI for 2025 and 2026. This trend is attributed to rising energy costs. The core CPI, which excludes volatile food and energy prices, is expected to remain above 2% through the end of this year.

UBS analysts project that the core CPI will reach 2% year-on-year by the end of 2025, slightly above the previous estimate of 1.9%. They also highlighted that food inflation, currently at 4.2% year-on-year, is likely to remain at similar levels during the first half of 2025. This is driven by the yen's depreciation and unstable supply chains.

Given the current circumstances, UBS experts anticipate an acceleration in headline inflation in Japan’s service sector. Historically, the services CPI has been relatively low at 1.5%, largely due to declining housing rent and government service prices. However, analysts foresee another wave of inflation service costs.

Inflation in key services, such as housing rent and government services, which account for 37% and 25% of the sector respectively, could gather steam further. However, UBS notes that the outlook in these areas remains obscure.