BOJ Expected to Hold Rates Steady, May Lift Inflation View

According to a Reuters report citing four people familiar with the Bank of Japan's thinking, policymakers could raise their inflation forecast for fiscal 2027 modestly as higher oil costs keep feeding into consumer prices. Still, the central bank is anticipated to keep its key interest rate unchanged at 1.25% on October 30.

This outcome is not very surprising following the rate increase in September. Traders are also pricing in virtually no probability of a hike next week. However, the situation for December is different, with traders assigning about a 73% chance of a move in the last month of the year.

That is what markets should concentrate on, rather than focusing on the short-term outlook next week.

The report also indicates that policymakers believe underlying price pressures have not shifted significantly, with scant evidence of a broader wage-price spiral emerging. In other words, the BOJ is not particularly concerned about inflation running out of control at this point.

Therefore, policymakers are signaling that they have some leeway to evaluate the effects of September's rate rise.

That said, the central bank may not be able to continue such a strategy indefinitely. Elevated oil prices and the risk of further yen depreciation could keep imported inflation high for a longer period. If those pressures start to affect broader price expectations, the BOJ could face problems if it remains inactive for too long.

But it is worth remembering that raising interest rates will do little to resolve Japan's underlying issues. Another hike will not create more barrels of oil to tackle the supply problem. As for the yen, intervention efforts have recently proved questionable in effectiveness.

For now, markets agree that the BOJ can afford to wait in October. The key question is whether the central bank can still afford to wait in December and into next year, given the pressure to accelerate policy tightening.