The Bank of Japan kept its guideline for the uncollateralized overnight call rate at around 1.25 percent on Friday, deciding by an 8 to 1 majority at the close of its October 29 to 30 meeting. The single dissent ran in the hawkish direction. Hajime Takata voted against and proposed a guideline of around 1.50 percent, arguing that underlying CPI inflation has reached the price stability target, that the situation has shifted to a new phase, and that the bank needs to step up the pace of bringing the policy rate closer to the neutral rate so that it can respond nimbly.
The quarterly Outlook Report made the judgment Takata cited. Underlying CPI inflation, the report says, “is at a level that is generally consistent with the price stability target of 2 percent, and is expected to remain at around that level.” Medium to long term inflation expectations sit at around 2 percent, and the mechanism in which wages and prices rise moderately in interaction with each other has been operating amid a strong sense of labour shortage. On that basis the bank repeated its guidance in full: it “will continue to raise the policy interest rate and adjust the degree of monetary accommodation” in response to developments in economic activity and prices and financial conditions, considering timing and pace.
The board’s median forecasts moved only on prices. For fiscal 2026 the median is real GDP growth of 0.7 percent and CPI (all items less fresh food) of 2.5 percent. For fiscal 2027 the medians are GDP of 0.7 percent and CPI of 2.6 percent, the CPI figure raised from 2.4 percent in the July report on the effects of the rise in crude oil prices since the summer. For fiscal 2028 the medians are GDP of 0.8 percent and CPI of 2.0 percent. The GDP medians are more or less unchanged from July. The forecasts take no account of the proposed temporary cut in the consumption tax on food and beverages now before the Diet; the bank estimates that cut, if applied as the Cabinet’s September outline sets out, would lower the fiscal 2027 CPI rate by around 1.3 percentage points.
The risk balance hardened the message. Risks to economic activity are generally balanced, the report says, while risks to the CPI outlook are skewed to the upside. With underlying inflation at the target, the bank warns, expectations could rise and underlying inflation could deviate above the target as firms shift further toward raising wages and prices. It describes a change of phase: while it was raising underlying inflation toward 2 percent, downside price risks warranted considerable attention; now the task is to keep the upward deviation risk from materialising. The named channels are the situation in the Middle East and crude oil prices, the expansion of AI related demand and the semiconductor and materials prices that come with it, and the yen, whose depreciation now passes into prices more readily than in the past because firms’ wage and price setting behaviour has changed.
The assessment behind the forecasts is steady rather than strong. Japan’s economy has recovered moderately, with some weakness in part, partly due to the impact of the situation in the Middle East. Exports have increased moderately on solid global AI related demand, corporate profits are at high levels, business fixed investment is on a moderate increasing trend, and private consumption has been resilient. CPI (all items less fresh food) has been rising at around 2 percent recently, with import prices rising and firms continuing to pass wage increases on to selling prices.
The meeting also settled the bank’s equity exit. By a unanimous vote, the bank will more than double the pace of sales of its ETF holdings from January 2027, to about 860 billion yen per year on a book value basis, from about 330 billion yen. At market value the new pace is about 2,460 billion yen per year, and the bank’s share of market trading value doubles to about 0.1 percent from about 0.05 percent. On those figures the time needed to complete the sales falls from about 112 years to about 43 years. Sales since January 2026 have proceeded smoothly without a major impact on the market, the bank said, while trading value in the stock market has been expanding. The pace of J-REIT sales stays at about 5 billion yen per year, the option of a temporary adjustment or suspension of sales in response to market conditions is retained, and the amendment to the disposal principles that writes the new figure into the rules takes effect on January 1, 2027.
Against expectations going in, the rate hold itself was the settled part: after September’s rise to 1.25 percent, no forecaster in the previews expected a second consecutive move, and this site’s October 28 preview put the Outlook Report’s target language at the centre of the event. That language arrived. What the previews did not settle was the dissent. One risk flagged before the meeting was that members who had opposed September’s rise might dissent against a hold in favour of a cut; the dissent that occurred was for an immediate rise instead. The path the previews described still applies, with the wording now behind it: a Reuters poll taken before the meeting found 54 of 78 economists expecting the rate to reach 1.50 percent this quarter, most of them naming the December 17 to 18 meeting. The yen stood at 157.84 to the dollar in this site’s tables on October 28.