Japan's central bank has decided to maintain its policy interest rate at 1.25%. It assessed that the underlying inflation rate, excluding temporary fluctuations, is generally in line with its target of 2%. This marks the first such evaluation since the inflation target was introduced 13 years ago in 2013. The Bank of Japan emphasized the importance of stabilizing the underlying inflation around 2% and made it clear that it is open to further rate increases.
Following its monetary policy meeting on October 29-30, the Bank announced on the 30th that it would keep the uncollateralized overnight call rate target at 1.25%. Out of nine policy board members, eight voted in favor, while Hajime Takata opposed the decision. Takata argued that since the underlying inflation has reached the target, it is time to accelerate the pace toward a neutral interest rate and proposed raising the rate to 1.5%, but his suggestion was rejected.
In its 'Economic and Price Outlook' report released on the same day, the Bank stated that the underlying inflation rate has reached a level that is generally consistent with the 2% price stability target. It anticipates maintaining a similar level going forward and stressed the importance of confirming whether inflation can stabilize around 2% for sustainable and stable achievement of the target.
The Bank of Japan projected the consumer price inflation rate, excluding fresh food, for fiscal year 2027 at 2.6%, which is 0.2 percentage points higher than the 2.4% forecast made in July. The Bank attributed the increase in its inflation outlook for 2027 to rising crude oil prices since summer. The forecast for fiscal year 2026 remains unchanged at 2.5%.
Additionally, the Bank unanimously decided to increase the annual sales of its held exchange-traded funds (ETFs) from 330 billion yen to 860 billion yen based on book value. This decision was made as this year's sales have not significantly impacted the market, and trading volumes in the stock market have increased. The new sales policy will take effect in January 2027.
According to the Nihon Keizai Shimbun (Nikkei), there is a prevailing view within the Bank that the recent economic and price trends are generally in line with the forecasts presented in September. There is no rush to assess the impact of the September rate hike. The Nikkei also noted that Bank Governor Kazuo Ueda described the consecutive rate hikes as a response to urgent circumstances during a press conference following the September meeting. Reports indicated that there was not a strong consensus within the Bank prior to this meeting to raise rates again.
The Bank of Japan introduced its 2% inflation target in January 2013. Former Governor Haruhiko Kuroda, who took office in the spring of that year, aimed for early achievement of the target through large-scale monetary easing, including massive purchases of government bonds. However, it took a long time for prices to begin rising due to persistent deflationary sentiment. The Nikkei explained that in recent years, rising oil prices and increased demand due to wage growth have contributed to the ongoing price increases.
However, this decision to hold rates does not signify the end of the rate hike cycle. The Bank indicated in its outlook report that the current financial environment remains accommodative and that it will continue to adjust the policy interest rate based on economic, price, and financial conditions. It emphasized the importance of stabilizing the underlying inflation rate around 2% to avoid adverse effects on the economy.
According to data from Dotan Research cited by the Nikkei, the probability of a rate hike at the December meeting reflected in the overnight index swap (OIS) market reached 80% as of the afternoon of the 29th. Attention is now focused on how Governor Ueda will explain the pace and criteria for further increases following the achievement of the inflation target during his press conference that afternoon.
* This article has been translated by AI.
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