Bank of Japan Expected to Hold Rates, Focus on Inflation and Board Divisions

Reaction to the decision will likely be seen in the yen and short-term JGB yields. A definitive statement that inflation has reached 2%, combined with assertive comments from Governor Ueda and a hawkish dissent, could boost the yen, lift two-year yields and reinforce expectations for a December rate move. Conversely, dovish dissents that advocate a rate cut might overshadow any hawkish rhetoric and spark fresh yen weakness—a risk underscored by the currency's steep declines earlier this year. Oil prices are still a major variable: additional increases in crude, linked to the Middle East conflict, bolster the argument for quicker policy tightening, as energy costs directly affect Japan's import bills and inflation expectations. The USD/JPY pair is also still processing the outcome of this week's Federal Reserve meeting.

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Other articles:

• Daiwa expects a rate hold but says a 2% inflation declaration could pave the way for a December hike
• MUFG sees a rate hold but a 2% inflation announcement with two dissenting members is the main risk for the yen
• BOJ to hold at 1.25% while Ueda indicates additional rate increases toward neutral
• BOJ expected to raise rates to 1.50% in December; 69% of economists predict a Q4 increase
• BOJ reportedly may upgrade inflation forecast at next week's meeting while holding rates steady

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The Bank of Japan appears ready to keep policy unchanged this week, but a formal acknowledgment that inflation has hit 2% and divisions within the board could drive market reactions.

Overview:

• The BoJ is anticipated to maintain its policy rate at 1.25%, with a rate increase this week considered highly improbable.
• The Outlook Report is expected by analysts to indicate that underlying inflation has achieved the 2% target, while inflation and growth projections may be revised upward due to oil prices.
• Market pricing implies about a 73% probability of a December increase, and 69% of economists surveyed by Reuters expect a rate of 1.50% in the current quarter.
• The risk of dissents is two-sided: two board members who voted against the September hike might advocate for a cut, whereas Takata could propose an increase.
• Governor Ueda's comments at the press conference, particularly any shift to language referencing 'the next meeting,' will be a crucial pointer for December.
• Softer inflation expectations support a wait-and-see approach, but higher oil prices, cost pass-through, and yen depreciation make a case for continued tightening.

The Bank of Japan is anticipated to leave its policy rate unchanged at 1.25% at the end of its two-day gathering on Friday. Market attention is directed more at whether the board will indicate a possible rate rise in December than at the decision itself.

A rate change this week would be a significant surprise. The BoJ increased its rate in June and then again in September, bringing the benchmark to its highest level in 31 years, and traders saw almost no possibility of consecutive increases before this meeting. According to a Nikkei article quoting a senior official, back-to-back rate rises would only be contemplated in a dire emergency. Market pricing indicated approximately a 73% probability of another increase in December. A Reuters survey of 78 economists showed that 69% anticipate the rate will climb to 1.50% this quarter, with the majority specifying December.

The quarterly Outlook Report is expected to be the key focus. Analysts widely anticipate that the board will essentially state that underlying inflation has reached the 2% price stability goal. Such a declaration would shift the policy focus from raising inflation to maintaining it. Governor Kazuo Ueda stated earlier this month that, with underlying inflation close to 2%, the central bank could not accept any additional increase. A Reuters story, citing sources with knowledge of the BoJ's views, indicated that policymakers might also raise their inflation forecast for fiscal 2027 as increased oil costs pass through to consumer prices. Analysts at a Japanese brokerage foresee upward revisions to growth and core inflation forecasts, primarily due to oil prices.

The board's vote may carry as much weight as the official statement. Two policymakers voted against the September rate increase, and MUFG has noted the possibility that they could oppose a hold and argue for a reduction. That scenario would strengthen a dovish perception and might prompt yen sales. Other analysts anticipate that board member Hajime Takata will dissent in the other direction, advocating for a rate increase as he did in July.

Governor Ueda's press conference will be scrutinized for any shift in his wording. If he shifts from stating that rates are set at each meeting to language that points toward the next meeting, markets would probably interpret that as a clear December hint. A more cautious tone, emphasizing a review of financial conditions following the September rise, could reduce expectations for a hike.

Several factors argue for patience. Surveys in October indicated that inflation expectations among households and businesses are softening, and sources informed Reuters that there is scant indication of a widespread wage-price spiral. ING predicts a rate hold this week, followed by two increases in 2027. On the other hand, a number of factors continue to push the central bank toward further tightening: oil-related price pressures from the Middle East conflict, expanding cost pass-through to consumers, and the risk of renewed yen depreciation.

Given that the policy rate is already within the BoJ's estimated neutral zone of roughly 1% to 2.5%, the discussion is moving from whether the bank will hike again to how much further it will go. Economists surveyed by Reuters are increasingly viewing a terminal rate of 2% or above as likely.

Governor Ueda's press conference is scheduled for 0630 GMT.