Goldman Sachs raises Japan FY2027 inflation forecasts; weaker yen, memory chips, and food prices are the main drivers

Overview

This report is an update from Goldman Sachs' Japan economics team on its forecast for Japan's inflation path. The core conclusion is that upside inflation risks for FY2027 have increased, mainly due to further yen weakness, rising memory chip prices passing through to consumer goods such as PCs and smartphones, and food prices rising again from summer onward. At the same time, FY2026 inflation forecasts were not revised broadly upward because pass-through from wage growth to private service prices has been slower than expected, while energy prices and government price control measures are suppressing core CPI.

Core views

Goldman Sachs sets its FY2026 and FY2027 new core CPI forecasts at 2.1% and 2.3%, respectively, with FY2026 unchanged from the prior forecast and FY2027 raised by 0.3 percentage points. For core CPI, the FY2026 forecast is lowered to 2.1%, while FY2027 is raised to 2.3%. The report argues that additional upside to inflation from yen weakness is limited at current exchange rate levels, but even a modest further surprise could reinforce BOJ concerns that underlying inflation is above 2%. Rising memory chip prices and a rebound in food prices will push up goods inflation, while wage pass-through on the services side remains relatively slow. On the energy side, core CPI is less sensitive to oil price fluctuations than before because of oil price uncertainty and government price control measures.

Analysis framework

The report uses a component-based inflation decomposition framework to assess the CPI impact of foreign exchange, memory chips, food, naphtha-related products, service prices, crude oil, and government price control measures. The analysis also compares B2B prices, CGPI, CPI component weights, and upstream/downstream supply-chain price pass-through to judge whether upstream cost shocks can feed into final retail prices.

Methodology notes

• Macro inflation decompositionNew core CPI and core CPI forecast decomposition

  Separately evaluates factors such as food, energy, exchange rates, chips, and service-sector wage pass-through.

  The report provides forecasts for new core CPI excluding fresh food and energy, and for core CPI excluding fresh food, and explains the differences between them arising from energy and policy controls.

• FX pass-throughLagged impact model of USD/JPY on CPI

  Every ¥10 depreciation of the yen lifts new core CPI by about 0.25 percentage points after roughly 12 months.

  Because inflation is affected by the rate of change in the exchange rate rather than the absolute level, the report believes that with the yen already beyond ¥160, additional modest depreciation has limited extra upside for inflation.

• Supply-chain price pass-throughB2B-to-B2C price pass-through analysis

  Compares CGPI, B2B service prices, and final demand prices to assess the degree of cost pass-through.

  The report finds that goods price pass-through is relatively clear, but final demand prices in services still lag upstream prices and wage growth.

• Scenario analysisCore CPI simulation under crude oil price scenarios

  Compares the effects of US$70, US$85, and US$100/bbl oil price paths on core CPI.

  Government controls on gasoline and utility prices reduce the sensitivity of core CPI to oil price fluctuations, but Middle East developments keep energy price risks two-sided.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• USD/JPY

  Yen weakness is a key driver of the upward revision to FY2027 inflation.

  Strengths

  The FX forecast was revised from ¥155/US$ to ¥165/US$, with a clear model-based pass-through to new core CPI.

  Weaknesses

  With the yen already above ¥160, further modest depreciation has limited marginal impact on inflation.

  Comparison

  Compared with periods when USD/JPY was around ¥100, the same ¥10 move has a smaller effect on the inflation rate.

  Risks

  If the yen continues to depreciate materially, it could intensify BOJ concerns that underlying inflation is above 2%.

• Japan rates and BOJ policy expectations

  Higher inflation forecasts may increase sensitivity to monetary policy normalization.

  Strengths

  Some BOJ underlying inflation indicators are near 2%, so even modest price upside could affect policy communication.

  Weaknesses

  Pass-through to private service prices remains slow, weakening evidence that wage-driven inflation is persistent.

  Comparison

  Cost pass-through is stronger on the goods side than in final demand pricing on the services side.

  Risks

  If service prices suddenly catch up with wage growth, expectations for policy tightening could heat up.

• Brent crude oil and Japan energy CPI

  Oil prices affect core CPI, but government price controls weaken the pass-through.

  Strengths

  The baseline assumes Brent falls back to US$70/bbl by end-2027, and gasoline price control measures may exit naturally.

  Weaknesses

  Middle East uncertainty leaves energy price risks two-sided.

  Comparison

  Compared with the past, after gasoline prices were effectively fixed by the government, core CPI reacts less to oil prices.

  Risks

  If oil prices remain at US$85 or US$100/bbl, core CPI still faces upside risk.

• Memory chips and consumer electronics prices

  AI server demand is driving up memory chip prices, with a lagged pass-through to PC and mobile phone CPI.

  Strengths

  B2B prices for PCs have surged since April, and higher mobile phone prices, especially for iPhones, could have a meaningful CPI impact.

  Weaknesses

  The CPI weight of PCs and tablets is only slightly above 0.3%, and retail prices are also affected by logistics and labor costs, making it hard to fully replicate B2B increases.

  Comparison

  The CPI weight of mobile phones is about 1%, giving them a larger overall CPI impact than PCs and tablets.

  Risks

  If price increases for new products this autumn and next spring approach 20%, next year's CPI could rise further.

• Japan food prices

  A third wave of food price increases could push CPI higher again from summer onward.

  Strengths

  A Teikoku Databank survey shows the number of food items seeing price hikes will rise again from July, and BOJ regional managers' meetings also show companies are considering price increases after summer.

  Weaknesses

  Rice prices may continue to decline as inventories rise, restraining food inflation.

  Comparison

  Food inflation in 2024-2025 was mainly driven by rice prices; later it is more likely to be driven by packaging materials, imported food ingredients, meat, and weather factors.

  Risks

  Lower wheat planting, higher meat import prices, and rising packaging film prices could extend food price increases into next year.

Key data

• FY2026 new core CPI forecast2.1%Unchanged from the previous forecast.
• FY2027 new core CPI forecast2.3%Raised by 0.3 percentage points from the previous forecast.
• FY2026 core CPI forecast2.1%Lowered by 0.2 percentage points from the previous forecast.
• FY2027 core CPI forecast2.3%Raised by 0.2 percentage points from the previous forecast.
• 12-month USD/JPY forecast¥165/US$Revised from the previous ¥155/US$, reflecting a weaker yen.
• FX pass-through elasticityA ¥10 depreciation of the yen lifts new core CPI by about 0.25 percentage pointsThe effect materializes with a lag of about 12 months.
• PC and tablet CPI weightSlightly above 0.3%Memory chip price increases contribute about 0.05 percentage points cumulatively to CPI.
• Mobile phone CPI weightAbout 1%If iPhone prices rise close to 20%, that alone would lift next year's CPI by about 0.1 percentage points; however, the weight may decline after the base revision.
• Potential impact of a consumption tax cutCore CPI could decline by 1.3 percentage pointsNot yet included in the baseline forecast, assuming it starts in April 2027.
• Brent crude oil assumptionFalls back to US$70/bbl by end-2027Goldman Sachs' commodities team lowered its previous forecast that 2027 would remain at US$80/bbl.

Impact & implications

The main implication of the report for asset pricing is that Japan's inflation path in fiscal 2027 is more likely to remain around or above 2%, increasing BOJ vigilance toward overheating underlying inflation. For foreign exchange, the marginal inflation impact of further yen depreciation may be smaller than during periods of a stronger yen, but policy reaction risk should not be ignored. For rates, if service-price pass-through accelerates later or food and chip price increases prove stronger, the market may reprice the BOJ normalization path. For consumer goods and electronics pricing, AI-related memory chip price increases are creating a lagged pass-through from B2B prices into CPI.

Risks

• The August 2026 CPI base revision may retrospectively adjust inflation for January-June 2026 and affect the future CPI path.
• A potential consumption tax cut is not included in the baseline forecast; if implemented in April 2027, core CPI could decline significantly.
• Middle East developments create two-sided risks to crude oil prices, although government price controls reduce pass-through to core CPI.
• Pass-through from wage growth to private service prices has been slower than expected, which may make inflation less persistent than goods-side signals suggest.
• If the yen weakens materially further, food price increases exceed expectations, or electronics price hikes broaden, BOJ policy concerns could intensify.

What to watch

• The new CPI series after the August 7, 2026 CPI base revision and its effect on future inflation rates.
• Whether USD/JPY stays above ¥165/US$ and how the BOJ comments on underlying inflation indicators.
• Pricing of new iPhone models this autumn and next spring, and the actual pass-through of PC and mobile phone prices into CPI.
• The number of food categories seeing price increases after July, rice inventory pressure, and trends in meat and wheat import prices.
• Changes in naphtha-related products, construction materials, and fuel prices in July CGPI.
• Whether private service prices show clearer final-demand price pass-through after strong wage growth.
• The pace of reduction or exit of government controls on gasoline, electricity, and gas prices in 2027.