Bank of Japan Nears Inflation Target Ahead of Potential December Rate Hike
The Bank of Japan (BOJ) is expected to signal that underlying inflation has nearly hit its 2% target during its upcoming meeting. This move would reinforce market expectations for another interest rate hike in December, according to a report by Reuters citing three sources familiar with the central bank's think tank.
While such a signal would be largely symbolic, it would demonstrate the BOJ's commitment to raising interest rates at relatively short intervals if inflation continues to align with its projections. The BOJ has emphasized anchoring underlying inflation around its 2% target when deciding the timing and pace of future rate increases.
Despite raising rates in September, many BOJ policymakers remain cautious about another hike this month. They prefer to gather more evidence on how previous rate increases have impacted domestic financial conditions. Recent economic data, including Tokyo consumer inflation and the BOJ's quarterly Tankan business survey, have strengthened the central bank's confidence that underlying inflation has broadly reached the 2% target.
The Tankan survey also showed that corporate inflation pressures were moving sideways rather than accelerating sharply, reducing immediate pressure for a second consecutive rate increase this month. Inflation expectations remain elevated but are not accelerating sharply, suggesting that price risks are present without signs of rapid deterioration.
The BOJ raised its key interest rate to a 31-year high last month, with Governor Kazuo Ueda signaling a focus on preventing underlying inflation from overshooting the 2% target. The latest rate increase followed another hike in June, leading financial markets to expect quarterly rate increases. A renewed decline in the yen could increase pressure for another rate hike in October, but reduced expectations for a U.S. Federal Reserve rate increase this month have eased some of that pressure.
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 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.