According to the latest published schedule, this monetary policy meeting runs from October 29 to 30, leaving just one more rate-setting window in December before the year ends.
This will be the Bank of Japan's second-to-last policy meeting of 2026. After lifting the policy rate to 1.25% in September, the BOJ is expected to deliver a hawkish hold at tomorrow's meeting on October 30. Market attention will center on the release of the October Outlook Report on Economic and Price Conditions, which will include updated forecasts for growth and inflation. If core CPI projections for fiscal 2027 and fiscal 2028 remain above 2%, that would support expectations for a rate hike to 1.75%-2.00% next year.
It is worth emphasizing that since exiting negative rates in March 2024 and beginning this hiking cycle, the BOJ has gradually raised the policy rate from 0% to 1.25%. The current supplementary deposit facility rate stands at 1.25% (effective since September 24, 2026), while the basic loan rate is 1.5%. The market widely believes this "normalization" process has entered its middle-to-late stage, so the meeting's guidance on the future rate path will carry more information value than whether the rate itself changes.
Price expectations remain well above 2%
After raising rates by 25 basis points to 1.25% in September, the BOJ's core signals were largely unchanged from before—upside price risks persist, real rates remain negative, and policy rates should continue to rise in the future. The only reason this October 30 meeting is not expected to deliver a hike may simply be that, since the BOJ gained monetary policy independence in 1998, it has never raised rates at two consecutive meetings. An October hike could therefore appear "impatient."
Behind this widely anticipated "no change" decision, the market will focus on the voting pattern. The BOJ's Monetary Policy Committee has nine members. At the September meeting, the 25 basis point hike to 1.25% passed by a 7-2 vote, with the dissents coming mainly from hawkish members advocating more aggressive tightening. Will hawkish member Hayato Tada dissect another dissent in favor of consecutive hikes? His support for a hike would not be surprising; what truly deserves attention is whether anyone else joins his camp. If more than one member dissents against "holding steady" this time, it would signal to the market that internal consensus is gradually building for "consecutive hikes," potentially boosting the yen and raising market pricing for a December hike. Conversely, if the vote shows a near-unanimous "no change" outcome, it would indicate most members prefer to wait for more data and proceed cautiously.
Even more closely watched is the October Outlook Report. The July report was quite hawkish—median forecasts for core inflation (excluding all items of food and energy) in fiscal 2027 and fiscal 2028 were 2.6% and 2.2%, respectively. Let's see how the new report adjusts these figures. It should be noted that the forecasts in this Outlook Report were compiled against the backdrop of sustained yen weakness in the first half of this year and a higher center of gravity for international oil prices. If core CPI forecasts for fiscal 2027 and 2028 remain above 2%, or even revised up from July, it would strengthen market expectations for a hike to 1.75%-2.00% next year. Conversely, if they are revised down due to weak domestic demand, it could be interpreted as a dovish signal, delaying market pricing for the timing of a hike. In addition, the report will update growth forecasts—under the dual constraints of slowing export growth and weak consumption recovery, the risk of downward growth revisions should not be overlooked.
For the BOJ, one comforting signal may be that inflation expectations have not deteriorated. The September Tankan survey showed that corporate inflation expectations edged down slightly from previous highs, and PPI (Producer Price Index) is also showing initial signs of peaking. Specifically, firms' median inflation expectations for the next one, three, and five years all slipped modestly from their highs but remain stably above the BOJ's 2% target. This pattern of "stabilizing at a high level" rather than "significant decline" is interpreted internally as a favorable signal—it proves the 2% inflation target is gradually being internalized by the market, while no "de-anchoring" risk requiring forceful policy intervention has emerged. Meanwhile, the narrowing of year-on-year PPI gains means upstream cost pressures are easing, giving downstream firms room to maintain prices and avoid "second-round inflation." Overall, the current inflation environment both supports the BOJ in continuing gradual rate hikes and does not yet justify a one-time large tightening.
Market reaction
The market is currently pricing an 80% probability of a 25 basis point hike in December, followed by a cumulative 50 basis points of further hikes by September next year. Recent surveys of economists show that respondents generally expect the BOJ to raise the policy rate to 1.5% in December, after which it may maintain a pace of roughly one hike per quarter, consistent with the BOJ's communication stance of "deciding meeting by meeting based on data." At the same time, there is some tension between the market and the government—the Japanese government wants the BOJ to slow down on debt management and fiscal expansion, but inflation pressures and yen depreciation pressures are forcing the BOJ to maintain a tightening bias. Some institutions estimate, based on a modified Taylor rule, that the BOJ's "theoretically appropriate rate" is around 1.35%, meaning a 25 basis point hike (to 1.5%) is fully justified, while further upside room is relatively limited. Cooling inflation, weak demand, and Japan's flat Phillips curve do not support overly aggressive tightening. Therefore, the case against the BOJ raising rates to the 1.75%-2.00% range is not strong.
Against this backdrop, the BOJ remains concerned about yen weakness, expanding AI demand, and high energy prices. Based on Friday's BOJ decision, there appears to be no clear reason for significant volatility in market rates or the yen. The dollar-yen exchange rate is currently driven mainly by the US-Japan interest rate differential—although inflation has retreated from its highs, Federal Reserve policymakers still emphasize being "data-dependent," and short-term rate cut expectations keep fluctuating, providing support for the dollar. Combined with the yen being in its own hiking cycle and becoming more sensitive to rate differentials, a Fed that stays hawkish will keep USD/JPY within a wide range of 157-159 through year-end. It is worth noting that if the BOJ signals a more hawkish stance than the market expects, or if the Fed turns dovish, either could trigger rapid yen appreciation and push the exchange rate out of its current range.
For Friday, a low-probability but high-impact risk is that Japan's GPIF (Government Pension Investment Fund) may announce a reallocation of funds domestically. GPIF is one of the world's largest pension funds, and any major adjustment to its asset allocation would directly impact Japanese stock and bond markets. We have previously argued that increasing the allocation to domestic securities would help the government's massive investment plans. Historical experience shows that in October 2014, GPIF's announcement of a higher allocation to domestic equities coincided with the BOJ expanding QQE (Quantitative and Qualitative Easing); the combination triggered a sharp yen depreciation and a Japanese stock rally, and this remains the most memorable instance of such allocation adjustments. Although Japanese government officials have repeatedly stated they have "no intention of adjusting GPIF's allocation structure in the short term," and the market has somewhat priced in such expectations, as a low-probability, high-impact event, any hint of increased domestic asset allocation—even just a change in wording—could trigger one-sided yen moves. For forex traders, this is the "black swan" scenario to guard against most outside of Friday's decision.
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