BOJ holds at 1.25%, says 2% inflation target reached

The Bank of Japan kept its policy rate at 1.25% on Friday, Oct. 30. It also said for the first time that underlying inflation is "generally consistent" with its 2% target. The bank set that goal in 2013, and until now it had only described inflation as "approaching 2 percent," CNBC reported. The board voted 8-1 to hold. Board member Hajime Takata dissented and pushed for a hike to 1.5%.cnbc.com

The bank is shifting its focus. It spent most of its modern history fighting low or falling prices, and now it is trying to keep inflation from running too high. That has raised expectations of another rate hike in December.

A new policy phase

The bank's quarterly outlook report said that downside price risks once demanded close attention, but "we have seen a change in phase." It added that the bank "must focus on preventing the risk of underlying inflation overshooting our 2 per cent target," according to Reuters via The Business Times. The bank raised its core inflation forecast for fiscal 2027 to 2.6% from 2.4%. It also lifted its "core-core" forecast to 2.7% from 2.6%. The fiscal 2027 forecast does not include a temporary consumption tax cut now before the Diet. The bank estimates the cut could lower consumer prices by about 1.3 percentage points.businesstimes.com.sg+2

The bank also surprised markets with a plan to step up sales of its exchange-traded fund holdings. From January, it will sell 860 billion yen a year, up from 330 billion yen now.businesstimes.com.sg

Ueda keeps December in play

At his post-meeting news conference, Governor Kazuo Ueda said the job was not finished. "Our goal is to sustainably and stably achieve our price target. In that sense, we haven't reached our goal yet," he said, according to Reuters. "That doesn't mean we will just sit and wait." Bloomberg reported that Ueda signaled strong prospects for a December hike. Markets are pricing in about an 80% chance of a move at that meeting, Dow Jones Newswires reported. The meeting is scheduled for Dec. 17-18.kentucky.com+3

Most analysts in a Reuters poll expect a hike to 1.5% in December and see rates peaking at 1.75% to 2%.businesstimes.com.sg

Growth remains the constraint

The 1.25% rate is the highest since 1995. Japan's core inflation reached 2.1% in September, and real wages have risen for eight straight months. The bank expects growth of 0.7% in both fiscal 2026 and fiscal 2027.www3.nhk.or.jp+1

Krishna Bhimavarapu of State Street Investment Management called the decision a "hawkish hold." He added that growth does not justify rushing the next move, since consumer spending is still the weakest part of the economy. Shoki Omori of Deutsche Securities described the change this way: "It is no longer a central bank trying to get to its target, it is one trying to keep inflation from running away from it".cnbc.com+1