The Bank of Japan held its benchmark interest rate steady at 1.25 percent on Friday while stating that underlying inflation has “generally” reached its 2 percent target, signaling potential further tightening ahead as wage and price pressures mount.
The central bank’s policy board voted 8-1 to maintain the current rate following a two-day meeting in Tokyo. Board member Hajime Takata cast the lone dissenting vote, pushing instead to lift the benchmark borrowing cost to 1.5 percent. The decision leaves the rate at its highest level since 1995.
Bank of Japan Assessment Reaches 2013 Goal
Friday’s policy statement marked a change for Japanese monetary policy. For the first time since adopting the target in 2013 as part of efforts to end decades of deflation, the central bank stated that underlying inflation is generally consistent
with its 2 percent target. Previously, the bank had described underlying inflation as approaching 2 percent.
Central bank officials pointed to a growing self-sustaining cycle where companies and workers move toward rising wages and prices. Government data shows that inflation-adjusted wages climbed for the eighth month in August, rising 1.5 percent from a year earlier, while core consumer prices in Tokyo rose 2.6 percent in October.
Finance Minister Satsuki Katayama reportedly told parliament that Japan was on the cusp of entering a period of sustained inflation driven by rising wages. The central bank’s framework traces back to January 2013, when it adopted its official price stability target under former Governor Haruhiko Kuroda. Kuroda subsequently deployed an ultra-loose monetary policy anchored by large-scale Japanese government bond purchases. Breaking through entrenched deflationary mindsets proved difficult, causing the effort to take longer than expected.
The nine-member policy board reached its 1.25 percent rate decision by majority vote. Analysts observed that the 8-1 vote carried little surprise. Hirofumi Suzuki, chief FX strategist at SMBC in Tokyo, noted that Takata’s dissent was unlikely to serve as a major market catalyst. Meanwhile, Tohru Sasaki, a former BOJ official currently serving as chief strategist at Fukuoka Financial Group, remarked that holding such a mountain of shares remains unhealthy for the central bank.
Upgraded Inflation Forecasts Fuel Rate Hike Expectations
Alongside its policy hold, the central bank released a revised outlook report that pushed price projections higher. The BOJ lifted its consumer price index forecast excluding fresh food for fiscal 2027 by 0.2 percentage points to 2.6 percent. It also raised its “core-core” inflation estimate—which strips out volatile fresh food and energy—to 2.7 percent for the same fiscal year.
Economists surveyed before the meeting widely anticipate another adjustment before the end of January, with a December move seen as increasingly likely.
The debate is no longer whether the BOJ normalises, but where the terminal (rate) lands. Our base case remains around 1.75% as Japan joins the synchronised global tightening cycle.
Krishna Bhimavarapu, APAC economist at State Street Investment Management, via CNBC
Krishna Bhimavarapu further noted that the BOJ exhibits growing confidence in achieving its target via a self-sustaining wage-price-consumption cycle, though he cautioned that domestic third-quarter GDP growth may lose momentum because consumption remains the weakest link. A CNBC survey involving 16 economists indicated that all respondents expect the BOJ to prepare the ground for another rate hike in either December or January. Furthermore, 13 of those respondents project a terminal rate between 1.75 percent and 2 percent by approximately mid-2027. Governor Kazuo Ueda emphasized that the bank will continue adjusting the degree of monetary easing based on ongoing economic, price, and financial data.
Market Reactions Accelerate ETF Selloffs
The policy announcement rippled through currency and bond markets. The Japanese yen gained ground against the U.S. dollar, while benchmark 10-year Japanese government bond yields fell 5.5 basis points to 2.78 percent, set for the lowest close since August 6.
In addition to interest rates, the central bank announced an acceleration in how it unwinds its equity holdings. The BOJ will speed up its divestment of Japanese exchange-traded funds. According to the central bank, the quicker pace means the complete unwinding will take 43 years rather than 112 years under the previous pace.
The historical backdrop of these exchange-traded fund purchases includes the “1% rule” introduced in 2011, under which the BOJ would intervene in afternoon sessions if the Topix stock gauge dropped by 1 percent or more during the morning. Through March 2024, the institution expended 37.19 trillion yen propping up the domestic equities market. Following the conclusion of the October meetings, the yen strengthened to a high of 157.115 per dollar. ANZ head of Asia research Khoon Goh stated that the global tightening cycle will persist as a primary driver for foreign exchange markets. Meanwhile, safe-haven flows pushed US Treasury yields lower, with the 10-year yield at 4.8958 percent and the 30-year bond yield at 5.2623 percent.
