Bank of Japan Eyes 2% Inflation Milestone Amid Rate Hike Speculation

The Bank of Japan (BoJ) may announce this month that underlying inflation has hit its 2% target, according to sources familiar with its thinking. This move, while largely symbolic, would strengthen expectations of a December interest rate hike and signal the BoJ's intent to continue raising rates at short intervals.

The BoJ has emphasized anchoring underlying inflation around its target when determining the pace of future rate increases. After raising rates in September, many within the central bank prefer to assess the impact of past hikes on domestic financial conditions before proceeding. Recent data, including Tokyo consumer inflation and the BoJ’s quarterly “tankan” business survey, have bolstered the bank’s confidence that underlying inflation is nearing the 2% target.

However, the tankan survey also indicated that corporate inflation is moving sideways, reducing pressure for an immediate policy response. One source noted that while inflation expectations remain elevated, they are not escalating sharply, a view echoed by another. A third source emphasized that prices are aligning with the BoJ’s projections, suggesting underlying inflation is now around its target.

The BoJ raised its key rate to a 31-year high in September, with Governor Kazuo Ueda indicating a focus on preventing inflation from overshooting its target. While a weaker yen could pressure the BoJ to hike rates in October, receding prospects of a US rate increase have eased some of that pressure. Analysts suggest the BoJ remains focused on tightening policy to mitigate inflationary risks.