Bank of Japan Expected to Confirm Inflation Target Reached
The Bank of Japan (BOJ) is preparing to announce that underlying inflation has reached its 2% target, a move that could strengthen expectations for another interest rate hike as soon as December. According to sources familiar with the central bank's thinking, this declaration may come in the quarterly outlook report following the October 29-30 policy meeting. Governor Kazuo Ueda hinted at this possibility in a recent speech, emphasizing the importance of anchoring inflation around the 2% target to avoid economic risks from an overshoot.
Recent data, including Tokyo consumer inflation and the BOJ's tankan business survey, have bolstered the central bank's confidence that underlying inflation is nearing the target. Factors like price pressures from geopolitical conflicts, strong AI-driven demand, and a weak yen could push inflation above the target. While some board members believe underlying inflation is already close to 2%, the tankan survey showed that corporate inflation expectations were not escalating sharply, reducing immediate pressure for a rate hike in October.
The BOJ's output gap data, showing positive readings for eight consecutive quarters, supports the case for continued rate increases. The output gap stood at 0.55% in the April-June quarter, up from 0.36% in the previous quarter, indicating excess demand and upward pressure on prices. Market analysts note that a formal acknowledgment of hitting the 2% target would reinforce expectations for a December rate hike and signal the BOJ's commitment to normalizing policy at a deliberate pace.
The BOJ raised its key rate to a 31-year high in September, following a hike in June, leading markets to anticipate further increases. While few expect action in October, the central bank's language suggests that another hike is not far off. The October policy meeting will be closely watched for any updates in the outlook report that confirm underlying inflation has reached the target, effectively locking in expectations for the next rate hike.