Global Market: BOJ seen nearing 2% inflation target as markets eye December rate hike

The Bank of Japan may signal later this month that underlying inflation has roughly reached its 2% target, strengthening expectations of another interest rate increase in December, a report by Reuters stated, citing three sources familiar with the central bank's think tank.

Such a signal would be largely symbolic, but it would reinforce market expectations for a December hike and demonstrate the BOJ's willingness to raise interest rates at relatively short intervals if price pressures continue to develop in line with its projections, according to the report.

The BOJ has increasingly stressed the importance of anchoring underlying inflation around its 2% target when determining the timing and pace of future rate increases.


Also Read | Global Market: Nikkei rises as Wall Street gains, oil prices fall

However, after raising rates in September, many BOJ policymakers remain cautious about delivering another increase this month and would prefer to gather more evidence on how previous rate hikes have affected domestic financial conditions, the sources told Reuters.

Recent economic data, including Tokyo consumer inflation and the BOJ's quarterly Tankan business survey, are likely strengthening the central bank's confidence that underlying inflation has broadly reached its 2% target, the report stated.

At the same time, the Tankan survey showed that corporate inflation pressures were moving sideways rather than accelerating sharply. That has reduced the immediate pressure on policymakers to deliver a second consecutive rate increase this month, as per the report.

The sources indicated that inflation expectations remained elevated but were not accelerating sharply, suggesting that price risks remain present without showing signs of a rapid deterioration. Overall, price developments were broadly consistent with the BOJ's economic projections, the sources told Reuters.

Also Read | Global Market | Central banks face tougher crisis-management role as public debt rises: BIS chief

BOJ shifts focus to inflation risks

The BOJ raised its key interest rate to a 31-year high last month, with Governor Kazuo Ueda signalling that policymakers had entered a phase focused more heavily on preventing underlying inflation from overshooting the central bank's target.

The latest rate increase followed another hike in June, leading financial markets to expect the BOJ to raise rates roughly once every quarter, Reuters reported.

A renewed decline in the yen could increase pressure on the BOJ to raise rates again in October. However, reduced expectations for a U.S. Federal Reserve rate increase this month have eased some of the pressure on the Japanese central bank to act immediately, analysts said, according to Reuters.

The BOJ remains focused on limiting inflation risks and could still signal its readiness for another rate increase in the near term.

At its September meeting, Ueda indicated that underlying inflation, which reflects the broad demand-driven trend in prices after stripping out temporary factors, was already close to the BOJ's 2% objective.

The summary of opinions from the September meeting also indicated that some policymakers believed underlying inflation was already close to the target or could reach it soon, Reuters reported.

Continued increases in wholesale and consumer prices, steady wage growth and a renewed rise in crude oil prices have further strengthened expectations that underlying inflation could remain sustainably around the BOJ's target, the sources told Reuters.

October meeting in focus

The BOJ is expected to highlight these developments when it publishes its quarterly economic outlook following its October 29-30 policy meeting.

The report could provide an important signal that underlying inflation has broadly reached the 2% target, strengthening expectations of a December rate hike while allowing policymakers to avoid another immediate increase in October.

In its previous quarterly report, released in July, the BOJ projected that underlying inflation would reach levels consistent with its 2% target sometime between October 2026 and March 2028.

The latest economic developments suggest the central bank may be approaching that milestone earlier, potentially giving policymakers greater confidence to continue gradually normalising monetary policy in the months ahead, the report stated.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)