BoJ Signals Further Hikes as Inflation Meets Target: Oct Summary

The Bank of Japan should continue raising interest rates as underlying inflation has reached a level broadly consistent with its 2% price stability target, while financial conditions remain accommodative, according to the summary of opinions from its October policy meeting. Policymakers noted the central bank should consider its next rate hike when conditions allow, while assessing economic resilience, particularly underlying consumption trends amid Japan’s aging and declining population. Some members argued that the BoJ should accelerate the pace of monetary tightening and bring rates closer to neutral, noting that firms have become more resilient to higher borrowing costs and the effects of previous hikes have yet to fully materialize. However, others urged a cautious approach, recommending that financial conditions be monitored for several months after each increase. The board kept rates unchanged at the meeting to assess the cumulative impact of previous hikes.

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%.