BoJ Sees Case for Further Rate Hikes: September Minutes

It was appropriate for the Bank of Japan to continue raising interest rates and adjust the degree of monetary accommodation in response to developments in the economy, prices, and financial conditions, according to its September meeting minutes. Members agreed that the timing and pace of further adjustments should be determined by assessing the likelihood of achieving the central bank’s baseline economic and inflation outlook, while monitoring risks such as the impact of the situation in the Middle East, expanding AI-related demand, and forex movements. They also stressed the growing importance of stabilising underlying CPI inflation around the 2% target to prevent an upward deviation that could hurt the economy. One member noted that monetary policy had entered a new phase, shifting from encouraging higher underlying inflation toward ensuring price stability through flexible responses to domestic and overseas economic developments, including exchange-rate-driven price pressures.

The Bank of Japan kept its short-term policy rate unchanged at 1.25% in an 8-1 vote at its October meeting, in line with market expectations. The decision followed two consecutive 25bp hikes in June and September, leaving borrowing costs at their highest level since April 1995. Policymakers indicated further rate increases, noting that underlying CPI inflation had aligned with the 2% target for the first time since the target was set in 2013, while financial conditions remain accommodative. Persistent labor shortages also sustain a moderate wage-price cycle, while inflation expectations stay around 2%. Board member Hajime Takata dissented, arguing that inflation had reached the target and warranted faster hikes toward the neutral rate. In its quarterly outlook, the BoJ maintained its FY2026 inflation forecast at 2.5% but raised its growth projection to 0.7% from 0.6%. For FY2027, the board lifted its inflation forecast to 2.6% from 2.4% but trimmed its growth outlook to 0.7% from 0.8%.

Bank of Japan Governor Kazuo Ueda told parliament Monday that underlying inflation is “quite close” to the 2% target, with strong global AI demand adding to price pressures from a tight labor market. He noted it was increasingly important to anchor inflation around 2%. While rising raw material costs from the Middle East conflict were lifting prices, Ueda added that demand-driven pressures from jobs and recovery were also at play. He further added that raising rates at an appropriate pace would help prevent spikes in bond yields, warning that failing to adjust policy could stoke concern over an inflation overshoot. Asked about fiscal spending, he replied that higher expenditure would spur wages and prices, though boosting supply capacity could moderate inflation longer term. The remarks came ahead of the central bank’s policy meeting later this month, where fresh growth and inflation forecasts will be closely watched for signals on rate-hike timing.