BOJ declares victory in hitting price target, signals near-term hikes
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TOKYO, Oct 30 : The Bank of Japan kept interest rates steady on Friday, but declared victory in a nearly 14-year battle to hit its price target and signalled vigilance against inflation risks, suggesting the next rate hike could be as soon as December.
With underlying inflation roughly hitting the BOJ's 2 per cent target, the central bank must focus on anchoring it around that level, it said, stressing anew that its policy has entered a new, more hawkish phase open to raising rates once every few months.
The broad shift in outlook aligns the BOJ with its US and European counterparts eyeing near-term rate hikes to battle inflationary risks from the AI boom and the Iran war-induced energy shock.
In a surprise move that marks a further shift away from ultra-loose policy, the BOJ said it would accelerate its sales of exchange-traded funds from January to 860 billion yen ($5.45 billion) per year from 330 billion yen currently.
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"Underlying inflation is at a level generally consistent with our price target, and is expected to remain at around that level," the BOJ said in a quarterly outlook report. "Against this backdrop, it will be important to examine the degree to which underlying inflation is anchored around 2 per cent."
At the two-day meeting ending on Friday, the BOJ maintained its policy rate at 1.25 per cent in a widely expected move, forgoing back-to-back hikes to spend more time scrutinising the effects of past rate hikes on lending conditions.
Hawkish board member Hajime Takata dissented to the decision to hold rates, instead proposing unsuccessfully a hike to 1.5 per cent.
"By judging that underlying inflation has reached 2 per cent, the BOJ has changed what it is trying to do: it is no longer a central bank trying to get to its target, it is one trying to keep inflation from running away from it," said Shoki Omori, chief Japan fixed income strategist at Deutsche Securities.
"That is a different reaction function, and the market should price it in as one."
While the BOJ's decision to speed up its ETF selling caught market players off guard, analysts saw it as yet another sign of the central bank's confidence in the economic outlook.
"The message is consistent with the broader normalisation story: the BOJ is becoming more willing to unwind its legacy balance sheet, but remains determined to do so without disrupting markets," said Masahiko Loo, chief fixed income strategist at State Street Investment Management in Tokyo.
TURNING POINT
In the report, the BOJ revised up its core consumer inflation forecast for the fiscal year ending March 2028 to 2.6 per cent from 2.4 per cent projected three months ago. It upgraded its estimate for so-called "core core" inflation, which strips away the effect of fuel costs, for both fiscal 2027 and 2028.
The central bank also said long-term inflation expectations were "moving around 2 per cent," signalling its conviction sustained price and wage gains were becoming more embedded in the public's mindset.
In the previous report released in July, the BOJ had said underlying inflation was nearing its 2 per cent target as long-term inflation expectations heightened gradually.
"In the past, we needed to pay significant attention to downside price risks. We have seen a change in phase. From now on, we must focus on preventing the risk of underlying inflation overshooting our 2 per cent target from materialising," the report said.
While the BOJ maintained its view financial conditions were accommodative, it said real interest rates were "rising recently." In the July report, it said real rates were "negative mainly in short- to medium-term zones."
Declaring victory on the 2 per cent inflation target marks a turning point for the BOJ, which has spent most of its history battling low or negative price growth since gaining legal independence from the government in 1998.
Under former governor Haruhiko Kuroda, the BOJ deployed massive monetary stimulus in 2013 to pull Japan out of deflation and fire up inflation to the 2 per cent target.
Even after ending its mix of unorthodox easing steps in 2024, the BOJ has trodden cautiously in raising rates on the view underlying inflation - or price moves excluding one-off factors and driven by domestic demand - remained below target.
With stubbornly high energy costs and rising import prices from a weak yen adding to inflationary pressures, the BOJ raised rates in September after delivering a hike in June - a shorter interval than the roughly twice-a-year hikes in 2024 and 2025.
Most analysts polled by Reuters expect the BOJ to raise its policy rate to 1.5 per cent in December, followed by further hikes next year. Their terminal rate projection centres around 1.75 per cent to 2 per cent.
Rising prices, however, could weigh on consumption as they prod Japanese households, many of whom have never experienced widespread price gains in their lifetime, to seek discounts.
($1 = 157.8500 yen)
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