People familiar with the matter said Bank of Japan officials are leaning against a rare back-to-back rate increase this month, but are still weighing the possibility of raising rates again as early as December.
These people said BOJ officials see little need for consecutive hikes when there are no signs that upside inflation risks will suddenly intensify.
They added that the BOJ will instead scrutinize economic data carefully to judge whether another rate increase is warranted as soon as its December policy meeting.
However, the people said the final policy decision at the October 30 meeting could still change at the last minute. That suggests the BOJ has not completely ruled out an October move, but for now favors observing the impact of previous increases on the economy and prices before deciding its next step.
After the report, the yen initially weakened and then pared some losses. As of publication, the U.S. dollar was slightly lower against the yen at 158.08.
The policy board led by Governor Kazuo Ueda raised borrowing costs to 1.25% last month to counter upside inflation risks. The September increase was the BOJ's second in three months and its fastest pace of tightening since 1990.
Ueda said the move was justified as the BOJ enters a new policy phase with greater focus on upside price risks. The hike also came amid persistent pressure from U.S. Treasury Secretary Bessent, who has urged the BOJ to continue normalizing monetary policy and help strengthen the yen.
Still, the BOJ has not raised rates in two consecutive months since 1980, reflecting its long-standing preference to first observe the effects of policy changes before deciding on further action. Pricing in the overnight index swap market shows traders see about a 10% chance of a BOJ hike this month, while the probability of an increase by December rises to 88%.
Among economists surveyed last month, about one-third expected the BOJ to raise rates in December, while more than half predicted the BOJ would wait until January next year to act. In late last month, market-implied odds of an October BOJ hike briefly rose to about 40%. But as Federal Reserve officials sent clear signals and investors no longer expected a Fed hike this month, expectations for a BOJ October move also faded.
BOJ Awaiting Right Timing for Another Hike, With Stable Prices the Key
People familiar with the matter said Japan's economy and inflation are broadly in line with the BOJ's expectations, and price trends are expected to align with the 2% inflation target at some point over the next 18 months.
Although more than a decade after setting an inflation target in 2013, the BOJ can now finally consider underlying inflation to be around 2%, that does not mean its mission is complete. The people said the BOJ's goal is not just to achieve 2% inflation, but more importantly to keep inflation stably around that level.
Ueda also touched on this in parliamentary remarks on Tuesday. He said it is crucial to keep price trends stable around 2%.
The latest price data show Japan's inflationary pressure has not faded. Japan's September corporate goods price index rose 6.8% year on year, down from 7.6% in August. The slower gain suggests the BOJ currently has no urgent need to act. The yen-denominated import price index rose 24.5% year on year, indicating a weak yen is still pushing up import costs, and the BOJ needs to judge how much wholesale price gains will pass through to consumer prices.
Meanwhile, household inflation expectations remain elevated. A BOJ survey showed 88.6% of households expect prices to rise over the next year, down from 90.4% in the previous survey. The share of households expecting prices to rise over the next five years rose to 86.5% from 86.1% in June.
The people said that with underlying inflation already near the BOJ's target, the central bank will continue to look for the right timing for another rate increase while assessing the effects of hikes so far.
In addition, the BOJ has pledged to closely monitor the situation in the Middle East, artificial intelligence-related demand and foreign exchange rate moves in deciding the timing of a hike.
The BOJ will release its latest quarterly economic outlook alongside its rate decision on October 30. The people said officials will assess the impact of elevated oil prices and consider whether to incorporate a pending temporary cut to the food consumption tax into their economic projections.
Oil prices have risen about 15% since the BOJ compiled its latest quarterly economic projections in late July, intensifying inflationary pressure on Japan. Japan is highly dependent on natural resource imports, making it more vulnerable to energy price increases.
Comments