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The Bank of Japan maintained its short-term policy rate at 1.25 percent in a decision reached by an 8-1 vote at the conclusion of its two-day meeting on Friday. Board member Hajime Takata dissented, calling instead for an immediate increase to 1.5 percent. The central bank said economic and price developments were progressing broadly in line with its prior projections even as it highlighted persistent upside risks to inflation from wage growth and global factors.
According to the Bank of Japan’s quarterly outlook report underlying inflation has now reached levels generally consistent with its 2 percent price stability target. The assessment allows policymakers to shift focus toward anchoring inflation around that level after years of battling deflationary pressures. The institution also slightly raised its core inflation forecasts for the current fiscal year and the next two years while stressing the need for vigilance against overshooting.
Bank of Japan Governor Kazuo Ueda told reporters at a news conference that the board would assess the case for additional rate hikes at every future meeting including the one scheduled for December. “We saw the need to scrutinise a bit more economic and price risks as well as financial conditions but underlying inflation has reached levels consistent with our price target” Ueda said. He added that financial conditions remain accommodative and that the central bank must adjust policy as appropriate to ensure inflation becomes sustainably anchored around 2 percent.
A Reuters survey of analysts found that most expect the central bank to lift the policy rate to 1.5 percent at its December meeting with a longer-term terminal rate projected around 1.75 to 2 percent. The Bank of Japan’s own gauge of underlying consumer prices excluding fresh food and special factors climbed to 3.2 percent in September up from 2.6 percent the prior month according to data the institution released earlier in the week. This acceleration reinforced the case for continued tightening the central bank indicated.
The decision follows the Bank of Japan’s move last month to raise the benchmark rate to 1.25 percent from 1 percent in what marked the highest level in 31 years. That September adjustment passed on a 7-2 vote and reflected growing confidence that price pressures were broadening across the economy. The central bank has since monitored the effects of higher borrowing costs on lending and consumption the institution reported.
Tokyo’s core inflation rate which often foreshadows nationwide trends exceeded the 2 percent target in October according to separate data published on Friday. Capital Economics head of Asia Pacific Marcel Thieliant said further tightening by the Bank of Japan appeared very likely with the policy rate potentially reaching 2 percent by the middle of next year. The central bank has repeatedly stated it will not tolerate underlying inflation exceeding its target and has entered a new phase of preemptive policy adjustments.
