Energy prices rose by 15%; core inflation remained unchanged.

In the staff projections released in September, the baseline for overall inflation stands at 3.0% for 2026, 2.5% for 2027, and 2.1% for 2028; the core measure—excluding energy and food—is projected at 2.5% for 2026, 2.6% for 2027, and 2.3% for 2028. The trajectories of these two lines are entirely distinct. Overall inflation declines steadily year-on-year—a smooth downward slope over three years—whereas core inflation actually rises in 2027, from 2.5% to 2.6%, only falling back to 2.3% in 2028—still above its 2026 starting point. Compared with the June projection, the 2026 baseline remains unchanged, while both 2027 and 2028 figures have been revised upward. A forecast treating the energy shock as a one-off disturbance would not exhibit this shape; only if forecasters expect costs to continue filtering downstream would they project core inflation rising in the second year. The Governing Council does not anticipate energy prices retreating on their own; rather, it expects this round of energy-related costs to feed into wages and service prices next year. Germany’s unchanged 2.4% core inflation figure for September, under this projection, simply reflects timing—not yet having arrived. The baseline for economic growth has also been revised upward: 0.9% for 2026, 1.4% for 2027, and 1.5% for 2028. Lagarde cited “stronger-than-expected resilience of the euro area economy” as the rationale. Manufacturing support stems from increased government spending across countries on defense and infrastructure. This point merits separate note: a substantial share of current euro area manufacturing orders does not reflect organic market recovery but rather fiscal expansion by national governments on defense and infrastructure. It is sustaining output—and simultaneously adding further demand-side pressure at a time when supply capacity is already squeezed by energy costs. A combination of robust growth, upwardly revised core inflation, and ongoing fiscal expansion is no reason to wait. October 13 Two weeks remain between the preliminary and final data releases—and the European Central Bank holds no meetings during this interval. On October 13, Germany will release the final September figures; euro-area-wide September data will be completed concurrently. Only after that will the Governing Council again confront this set of numbers. Two-sided risks Lagarde described the risks as asymmetric: upside risks to inflation, downside risks to growth. This statement effectively means the Council holds no policy option capable of improving both sides simultaneously. Further rate hikes to curb inflation would weigh on growth—already just 0.9%—while pausing to wait would mean accepting the 0.1 percentage-point upward revision to 2027 core inflation materializing. Her proposed approach is non-committal: “We do not pre-commit to any specific interest-rate path,” and decisions will be made meeting-by-meeting, data-dependent. Euro-area inflation stood at 3.3% in August—the highest in three years. Germany’s preliminary September figure was also 3.3%. Germany’s final September figure will be released on October 13; the ECB’s next monetary policy meeting follows thereafter. References German Federal Statistical Office, “Inflation Rate Expected to Reach +3.3% in September 2026,” Press Release PD26_348_611, September 30, 2026 https://www.destatis.de/DE/Presse/Pressemitteilungen/2026/09/PD26_348_611.html

Economic divergence between Japan and Germany following the Plaza Accord.

The Nikkei 225 Index surged from roughly 13,000 points in 1985 to 38,957 points in December 1989. Tokyo land prices soared to the point where ‘selling Tokyo could buy the entire United States.’ Between 1985 and 1990, Japan’s land price index rose an average of 18.7% annually—compared with just 3.2% in Germany and 5.6% in the U.S. After the bubble burst in 1990, Japan raised interest rates five times consecutively within three months—but it was already too late. Thereafter, Japan entered a three-decade-long period of low growth, deflation, and financial system ‘zombification.’ 1.3 Industrial hollowing-out: R&D relocated alongside manufacturing Following yen appreciation, Japanese firms—seeking to maintain price competitiveness—massively shifted production bases to lower-cost Asian regions. Unlike German firms, Japanese companies relocated not only manufacturing but also R&D and core supply-chain capabilities overseas. By the 1990s, overseas production had increasingly supplanted domestic production, triggering an irreversible structural shift in Japan’s export-oriented economic model. This ‘dual relocation’ caused Japan’s manufacturing value-added ratio to fall from 38.5% in 1985 to 29.7% in 2000, whereas Germany’s rose by 12.3 percentage points to 40.9% over the same period. When the bubble burst and domestic demand contracted, the Japanese government attempted to revive the economy through fiscal stimulus and monetary easing—but part of its industrial base had already moved abroad. As a result, much of the stimulus leaked overseas, reinforcing a vicious cycle: shrinking domestic demand → stronger corporate resolve to ‘go global’ → further decline in domestic investment and employment → even weaker domestic demand. Over the four decades since the Plaza Accord, Japan’s exports grew only fourfold, while Germany’s grew more than ninefold—the gap rooted precisely in this divergence. II. Germany: Why did it avoid ‘Japanification’? 2.1 Monetary policy: Price stability as the sole anchor The first critical divergence between Japan and Germany lies in their monetary policy orientation. Unlike Japan—which maintained an ultra-low 2.5% policy rate even after the Louvre Accord—Germany’s Bundesbank immediately raised its base rate from 3% to 6% by 1989 following that agreement. The Bundesbank’s independence is constitutionally enshrined, and price stability is its highest—or indeed sole—mandate. Faced with U.S. pressure to cut rates, the Bundesbank took a firm stance: safeguarding domestic price stability and output took absolute priority; it would not sacrifice price stability to lower interest rates. The results were striking: between 1985 and 1989, Germany’s average inflation rate stood at just 1.3%, far below the U.S. level of 3.6%; land prices rose only 29% over the same period—well below Japan’s 51%—and German real estate prices entered a prolonged plateau after 1995, whereas Japan’s peaked in 1991 and then declined for nearly three decades. Academic research confirms that among the four major Plaza Accord countries, monetary policy significantly shifted toward expansion in three—Germany being the sole exception. Key conclusion: Germany’s central bank actively counteracted capital inflows driven by currency appreciation using interest-rate tools—rather than passively allowing market forces to inflate asset prices. This discipline stemmed from historical memory—the collective trauma of Germany’s hyperinflation in 1923, which forged the central bank’s zero-tolerance stance toward inflation.

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