Bank of Japan Signals Inflation Target Hit

The Bank of Japan (BOJ) may announce this month that underlying inflation has reached its 2% target, according to three sources familiar with its thinking. This symbolic move would reinforce expectations of another interest rate hike in December and signal the BOJ's commitment to raising rates at short intervals. The central bank has recently emphasized the importance of anchoring inflation around its target when deciding the timing and pace of future rate increases.

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 the target. While some market participants anticipate a rate hike in October, many within the central bank prefer to wait and assess the impact of recent rate increases on domestic financial conditions. Recent data, including Tokyo consumer inflation and the tankan business survey, have strengthened the BOJ's belief that underlying inflation is now roughly at the 2% target.

The tankan survey also showed that corporate inflation is moving sideways, reducing pressure for an immediate policy response. One source noted that inflation expectations remain elevated but not flaring up, suggesting that while inflation risks persist, they are not escalating sharply. Another source echoed this view, stating that prices are moving in line with the BOJ's projections, indicating that underlying inflation is now around the target.

The BOJ is expected to highlight factors such as steady wage gains, rising consumer and wholesale inflation, and increasing crude oil prices in its upcoming quarterly report due after the next policy meeting on October 29-30. These elements are likely to support the central bank's assessment that underlying inflation has reached the 2% target. In its previous report released in July, the BOJ had projected that underlying inflation would hit the 2% target sometime between October and March 2028.