BOJ expected to assess underlying inflation at 2% target on Friday

The BOJ is expected at its Friday policy meeting to assess that underlying inflation has broadly reached its 2% target, according to Reuters, citing people familiar with the matter. Reuters reported that the assessment would shift the bank’s policy focus from supporting inflation to keeping price growth near its target.

BOJ’s expected 2% assessment and 1.25% rate decision

At the two-day meeting ending on Friday, people familiar with the BOJ’s thinking told Reuters that the bank is widely expected to keep its policy rate unchanged at 1.25%.

More time to examine the effect of previous rate increases on lending conditions and economic activity would result from that decision, Reuters reported, citing people familiar with the BOJ’s thinking.

Underlying inflation is likely to be described as having broadly reached the 2% target, according to people familiar with the matter cited by Reuters.

Bank lending and accommodative financial conditions were cited as evidence that borrowing conditions remain supportive, leaving room for additional increases, Reuters reported.

A slight increase in the inflation forecast for the next fiscal year is also likely, people familiar with the matter told Reuters.

Policy focus shifts from stimulating inflation to keeping it near target

Reuters reported that the expected change in the BOJ’s assessment would move its policy focus from efforts to stimulate inflation towards keeping price growth stable around the target.

Governor Kazuo Ueda had indicated a change in policy focus when the BOJ raised interest rates in September, Reuters reported.

Future rate increases are not expected to receive explicit guidance on their timing or pace as policymakers weigh inflation risks and possible disruption to financial markets from an early hike, according to Reuters.

BOJ staff estimated a neutral-rate range of 1.1% to 2.5%, within which the policy rate sits, Reuters reported.

BOJ’s inflation campaign began in 2013

Japan’s central bank, the BOJ, under then Governor Haruhiko Kuroda, launched an aggressive monetary policy stance in 2013 with a goal of sustainably achieving 2% inflation as reported by Reuters.

The central bank had withdrawn all of its unconventional monetary policy easing in 2024 and was continuing to raise rates cautiously as it believed that the underlying inflation was below target, Reuters reported.

Increases in the Fed’s federal funds rate in June and September have caused the Fed to move more frequently than the roughly twice-a-year pace of 2024 and 2025, Reuters reports.

December or January remains under discussion for the next increase

Reuters polls expect BOJ to raise interest rate to 1.5% in December and raise it in subsequent quarters.

Mitsubishi UFJ Morgan Stanley Securities’ Chief Bond Strategist Naomi Muguruma expects the BOJ to assess various economic data as well as markets prior to a possible rate hike in December and weigh the option of raising rates in December against a January hike.