BOJ declares victory on inflation, signals possible December rate hike
The Bank of Japan kept rates steady but declared underlying inflation has hit its 2 per cent target, signalling a hawkish new phase. A December rate hike is possible, and the BOJ will accelerate ETF sales from January.
The Bank of Japan (BOJ) kept its policy rate unchanged at 1.25 per cent on Friday, but declared victory in a nearly 14-year struggle to reach its 2 per cent price target. The central bank signalled vigilance against inflation risks, suggesting the next rate hike could come as soon as December.
In a quarterly outlook report, the BOJ said underlying inflation is “generally consistent with our price target” and expected to remain around that level. It stressed that policy has entered a new, more hawkish phase, open to raising rates once every few months. “From now on, we must focus on preventing the risk of underlying inflation overshooting our 2 per cent target from materialising,” the report said.
In a surprise move, the BOJ announced it would accelerate sales of exchange-traded funds (ETFs) from January to 860 billion yen (US$5.45 billion) per year, up from 330 billion yen currently. Analysts viewed this as a sign of confidence in the economic outlook. Masahiko Loo, chief fixed income strategist at State Street Investment Management in Tokyo, said: “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.”
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 also upgraded its estimate for “core core” inflation, which strips away fuel costs, for both fiscal 2027 and 2028. The central bank said long-term inflation expectations were “moving around 2 per cent,” signalling sustained price and wage gains were becoming more embedded in the public’s mindset.
Hawkish board member Hajime Takata dissented to the decision to hold rates, proposing unsuccessfully a hike to 1.5 per cent. 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, with a terminal rate projection of around 1.75 per cent to 2 per cent.
Shoki Omori, chief Japan fixed income strategist at Deutsche Securities, said: “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.” 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.