What markets expect on Friday
Every BOJ watcher polled by Bloomberg expects the central bank to leave its policy rate unchanged this week, following last month's increase to 1.25%. That September adjustment was the second in three months, the quickest tempo of hikes in 36 years.
This meeting lands right after the US Federal Reserve kept its settings steady overnight. That move pressured the dollar and left the yen around 157.84 per dollar on Thursday morning in Tokyo. Investors will also parse Friday's board vote after a 7 to 2 split last month highlighted differences over the inflation outlook.
The inflation milestone and why it matters
The key question is whether the BOJ will declare that underlying inflation has essentially reached 2% for the first time since the target was introduced in 2013. The bank has kept its exact read on underlying price trends vague, even as multiple gauges have shown inflation becoming entrenched. In March, it rolled out new price indicators to capture core pressures while removing mostly temporary swings.
If the BOJ upgrades its view, it would strengthen the case for additional increases while policy remains relatively stimulative. Acknowledging the goal as met would also shift attention to the distance rates still have to travel to get to neutral. The BOJ puts neutral somewhere between 1.1% and 2.5%, though it stresses the estimate is imprecise. JPMorgan Securities and BNP Paribas both see a 2.5% terminal rate in this cycle, and an upgraded assessment would set up December, when over 80% of economists expect action.
What officials and economists are saying
Governor Kazuo Ueda has said underlying inflation is "very close" to 2%, signaling a potential shift in the quarterly outlook due Friday, and earlier this month he noted the BOJ would not allow underlying inflation to climb much above current levels. BNP Paribas's Ryutaro Kono, the firm's chief Japan economist, said, "The BOJ is likely to judge that underlying inflation has now reached around 2%," and he argued the bank aims to guide the rate toward neutral in the near term, while also saying upside risks aren't strong enough to merit back-to-back hikes. People familiar with the matter said the BOJ may keep raising at about the current pace, given price trends and limited economic impact so far.
Seisaku Kameda, a former BOJ economist now at Sompo Institute Plus Inc., underscored the persistence of price gains: "In five or six years, a first-grader basically enters middle school. If someone claimed that inflation persisting through that entire period isn't a trend, it's hard to see people accepting that." Taro Kimura of Bloomberg Economics said preliminary indications before next year's wage negotiations point to faster pay gains in 2027, a development that could stoke inflation and potentially take BOJ rates above the roughly 2% terminal level that markets now anticipate.
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The data and the stakes for your portfolio
A BOJ measure of underlying inflation rose to 3.2% last month, the highest in three years. Inflation excluding fresh food, a key BOJ gauge, has exceeded the 2% target for four consecutive fiscal years up to March of this year and, if current forecasts prove accurate, is on track to continue for six. Japan's biggest labor federation plans to seek larger pay raises in talks expected to conclude with a deal in March, following three years of historically strong wage gains.
The bank's nine member board revealed differing views with last month's 7 to 2 vote, a split that helped weaken the yen despite a rate increase. The broader backdrop: in March 2024, the BOJ scrapped yield curve control and closed the chapter on the world's last negative policy rate as confidence increased that underlying inflation was nearing the goal. To date, Ueda has carried out six rate increases, the most by any individual BOJ governor over at least half a century.
The inflation milestone would cap a campaign launched in 2013 that ultimately required nearly a decade and the global inflation shock after Russia's invasion of Ukraine to deliver sustained price gains. Former deputy governor Hiroshi Nakaso said, "Japan is back," adding, "Deflation is finally behind us and the economy is shifting to an inflation regime." He has also emphasized the need for a strong government growth strategy once the target is achieved, saying, "Its necessity has not diminished in the slightest."
Why it matters: a clear statement that underlying inflation has reached 2% would set expectations for the path toward neutral, which the BOJ estimates between 1.1% and 2.5%. With JPMorgan Securities and BNP Paribas projecting about 2.5% for this cycle and most economists looking to December for the next move, your portfolio's Japan exposure will likely trade on how firm the BOJ's language is and how unified the board appears on the road ahead.
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