On Tuesday during Asian trading hours, the US dollar traded in a narrow range against the Japanese yen, changing hands near 158.20.
Daiwa Securities said the Bank of Japan is entering a new phase in which its policy goal is no longer to push inflation up to 2% but to keep it stable at that level. The heart of this shift lies in the durability of wage growth. BoJ Governor Kazuo Ueda said at an October 16 press conference that underlying inflation is roughly near 2%, and a further rise from that level would be unacceptable. He noted that the central bank had previously been willing to let underlying inflation climb toward the target, but firmly anchoring inflation near 2% has now become the core policy objective.
Daiwa said these remarks confirmed the policy pivot it had previously identified, from "reaching 2%" to "stabilizing at 2%." This shift means the BoJ no longer needs to push inflation higher, but rather to prevent it from deviating too far from 2%. The adjustment to the policy framework moves the central bank's focus from "whether the target is met" to "how the target is maintained," and sets a new logic for the timing and pace of future rate hikes.
October meeting: likely on hold, but inflation assessment may be raised
Ueda said the policy committee will discuss in depth at its October 29-30 meeting whether underlying inflation has reached 2%. Daiwa, citing reports, said the BoJ may keep its policy rate at 1.25% at that meeting but could raise its assessment of underlying inflation to roughly around 2%. That would not be taken as immediate achievement of the price target, and the central bank is expected to keep raising rates while financial conditions remain accommodative, with reports saying a December hike has not been ruled out. The core of this expectation is that the October meeting will most likely stand pat, but may send a hawkish signal by upgrading its inflation assessment. If the central bank formally acknowledges that underlying inflation has reached around 2%, it would pave the way for a hike in December or later while retaining policy flexibility.
Wages are key: the spring 2027 talks are the window to test whether inflation has taken hold
Daiwa said there is no need to accelerate the pace of rate hikes because consumer spending remains weak, even though corporate investment stays strong. Core machinery orders rose 5.2% in August, pointing to resilient capital expenditure, including in AI-related areas. At the same time, inflationary pressure has not clearly faded. Corporate goods prices rose 6.8% year on year in September, slowing from 7.6% in August but still at a high level, and import prices have started rising again due to higher crude oil prices. The firm believes next spring's wage negotiations are the key test of whether inflation has become entrenched. Japan's largest labor federation, Rengo, is reportedly considering demanding wage increases of 5% or more in 2027, which would mark a fourth straight year at that level, with an even higher target of 6% or more for small firms and an overall target of about 6%. This year's talks delivered wage gains of about 5%, but increases at small firms were lower, at about 4.7%. Daiwa said what matters is not only the headline figure but whether strong wage growth can become a lasting norm and spread from large companies to smaller ones. More details will emerge in the coming months, including Rengo's basic plan in October and business lobby Keidanren's stance in November, giving the BoJ a clearer read before its December meeting.
Market implications: yen supported, short-end JGB yields may rise
Daiwa's interpretation points to a BoJ that is in no hurry to act but has not finished raising rates. That leaves the yen supported by any sign that wage growth is becoming entrenched. Keeping rates unchanged at the October 29-30 meeting, combined with an upgraded inflation assessment, would keep a December hike in view and could push short-term Japanese government bond yields higher. Oil prices are the key swing factor. Daiwa noted that import prices have started rising again because of higher crude oil prices, and if the Iran conflict drives oil prices sharply higher, it would increase the risk of inflation overshooting and strengthen the case for faster tightening. For Japanese equities, gradual rate hikes alongside solid capital expenditure are unlikely to derail the market, but a faster pace of tightening would test valuations. Long-end JGB yields have already risen above 3% and remain sensitive to any shift in the BoJ's tone.
Yen marginally supported, but rate differentials still dominate
Daiwa's reading has a marginally yen-positive effect on the US dollar against the yen. The core logic is that the BoJ's shift from "pursuing 2%" to "maintaining 2%" means the direction of policy normalization is unchanged, only the pace is more cautious. The October meeting will most likely keep the policy rate at 1.25%, but may raise the inflation assessment to roughly 2%, keeping a December hike in view. If the spring 2027 wage talks show that pay increases have become a lasting norm and are spreading to small firms, the case for the BoJ to tighten faster will strengthen, and the yen's interest rate disadvantage may gradually narrow, providing a medium-term support base for the currency. In the short term, however, the US dollar against the yen remains dominated by the US-Japan rate differential. The US 10-year Treasury yield is holding near 5.30%, and expectations for a Fed hike in December are still priced in, so the wide rate gap has not changed. Daiwa also noted that the BoJ is in no rush to accelerate rate hikes, with weak consumer spending constraining the pace of tightening. As a result, support for the yen is more likely to emerge gradually over the medium to long term rather than immediately reversing the currency's direction. Oil prices are the key swing factor. If the Iran conflict pushes oil prices higher, rising Japanese import prices will increase the risk of inflation overshooting, possibly prompting the BoJ to tighten faster, which would provide additional support for the yen. Overall, the US dollar against the yen is likely to remain range-bound between 157 and 159 in the short term, with the BoJ's October meeting, progress in wage talks and oil price moves being the core variables determining the medium-term direction.
Summary
Daiwa believes the BoJ is shifting from pursuing 2% inflation to maintaining 2%, with the durability of wage growth being key. Ueda said underlying inflation is close to 2% and a further rise would be unacceptable, and the central bank will make anchoring inflation near 2% its core objective. The October meeting is expected to keep the policy rate at 1.25% but may raise the inflation assessment to roughly 2%, with a December hike not ruled out. Daiwa believes there is no need to accelerate rate hikes because consumer spending is weak while corporate investment is strong, and inflationary pressure has not clearly faded. The spring 2027 wage talks are the key test of whether inflation has become entrenched, and Rengo may demand wage increases of 5% or more; what matters is whether the increases become a lasting norm and spread to small firms. For the market, this interpretation points to a BoJ that is in no hurry to act but has not finished raising rates, with the yen supported by signs that wage growth is becoming entrenched. Keeping rates unchanged at the October meeting while raising the inflation assessment would keep a December hike in view and could push short-term JGB yields higher. Oil prices are the key swing factor, and long-end JGB yields remain sensitive to any shift in tone. (US dollar against the yen daily chart, source: Yihuitong) As of 13:05 Beijing time, the US dollar against the yen was quoted at 158.20/21.
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