The Bank of Japan (BOJ) is expected to maintain its policy interest rate at the upcoming monetary policy meeting this month, as it assesses the impact of last month's rate hike on the economy and inflation. However, it is likely to conclude that the underlying inflation rate, excluding temporary fluctuations, has effectively reached the target of 2%. Moving forward, the BOJ is expected to focus on stabilizing inflation to prevent it from exceeding this target, while weighing the timing of any further rate increases.
According to the Nihon Keizai Shimbun (Nikkei) on October 23, the BOJ plans to keep the policy interest rate at 1.25% during its meeting on October 29-30. A BOJ official stated, "Unless there is a special emergency, there will be no consecutive rate hikes." BOJ Governor Kazuo Ueda also mentioned at a press conference in Bangkok on October 16 that economic indicators related to Japan have generally moved as expected since the September meeting, and no new developments warranting a change in outlook have emerged.
During this meeting, the BOJ is likely to indicate through its quarterly 'Economic and Price Outlook' report that the underlying inflation rate has reached a level consistent with the 2% target. This underlying inflation rate is a key indicator the BOJ considers when deciding on interest rate adjustments.
Hawkish policymakers advocating for rate hikes have already expressed the view that the inflation rate has reached 2%, and other members have also noted that it is around this level. Governor Ueda stated at the October 16 press conference that the underlying inflation rate is "generally close to 2%, and any further increase beyond this is unacceptable." While reaching the target does not immediately trigger a rate hike, it suggests that the BOJ could act more swiftly if inflation risks rise above the target.
The BOJ is monitoring inflationary pressures stemming from rising oil prices due to instability in the Middle East, increased demand related to artificial intelligence (AI), and the depreciation of the yen. In particular, recent increases in oil prices may lead to a rise in consumer prices, following increases in corporate transaction prices. The upcoming outlook report may revise the median forecast for core consumer price inflation, excluding fresh food, for the fiscal year 2027 upward from the previously projected 2.4%. The impact of the food consumption tax reduction, currently under review in the National Assembly, is not expected to be reflected in this forecast.
December Rate Hike Likely
The next rate hike is likely to occur in December. The BOJ has generally raised rates at six-month intervals, but this year it accelerated the pace with increases in both June and September. According to short-term financial market research firm Dotan Research, as of the afternoon of October 22, the overnight interest rate swap (OIS) market reflected a 4% probability of a rate hike in October, while December's probability reached approximately 80%. The market anticipates that an additional hike will occur by the January meeting at the latest.
The U.S. interest rate decision also poses a variable. The U.S. Federal Reserve will hold its Federal Open Market Committee (FOMC) meeting just before the BOJ meeting on October 27-28. According to Nikkei, many market participants expect the Fed to hold rates steady this time but to raise them in December. An increase in U.S. rates could widen the interest rate gap between the U.S. and Japan, leading to a weaker yen and higher import prices, which may pressure the BOJ to raise rates further.
There is also uncertainty regarding how high rates may be raised. The BOJ estimates the neutral interest rate, which neither overheats nor constrains the economy, to be between 1.1% and 2.5%. However, Governor Ueda stated on October 16 that there is no clear basis for determining the exact level of the neutral rate. In the 'Key Opinions' from the September meeting released on October 1, one member pointed out that the neutral rate could exceed previous estimates or market expectations depending on overseas trends. This suggests that rates could surpass the previously considered upper limit of 2.5%.
The BOJ has noted that financial conditions remain accommodative despite previous rate hikes, citing significant increases in bank lending. This indicates that inflationary pressures are still present. Governor Ueda also stated at the October 16 press conference, "We will continue to raise the policy interest rate to adjust the degree of financial accommodation." Attention will be focused on how the BOJ evaluates inflation risks and what statements it makes regarding the timing of further rate hikes following the October 30 meeting.
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.