BOJ May Signal Inflation Is Roughly at 2%, Bolstering Case for December Move

Although another increase is unlikely at this month's gathering, the Bank of Japan looks ready to move closer to additional policy tightening.

The October quarterly outlook may let the BOJ indicate that underlying inflation is now more or less at its 2% target, according to people with knowledge of the central bank's thinking, in a report carried by Reuters.

That would carry considerable symbolic weight. A bank that has spent years striving to create durable inflation would see such a statement as a notable change in the policy environment. It would also underline how prepared policymakers are to move rates higher again in the months ahead.

To be clear, the shift would not guarantee subsequent rate increases, but it would strengthen expectations that action will come in December and may hint that the BOJ could accelerate the tempo of tightening.

The sources add that recent economic figures help account for the altered tone, with policymakers observing consistent wage growth and firmer price pressures at both consumer and wholesale levels. They note that Tokyo's latest inflation readings and the central bank's Tankan survey have bolstered confidence that underlying inflation is close to 2%.

Even so, the report indicates no pressing need for an immediate follow-up after September's rate increase. Sources say “many” at the bank favour a more cautious approach in October, waiting for more evidence of how earlier hikes are working through the economy.

Market pricing points the same way. The odds of no change in October are roughly 86%, a figure that seems fair given the bank's move in September.

What comes next is the larger issue.

At the moment, markets put about a 64% probability on another increase by December, and an explicit statement that underlying inflation has effectively reached 2% would reinforce that assessment.

More importantly, such a signal would sit well with the measured tightening path so far. Rate increases came in June and again in September, indicating that officials remain in normalisation mode while avoiding overly aggressive steps – for now.

Viewed this way, the report frames the October meeting as further preparation for additional tightening.

If the central bank can now more readily describe underlying inflation as being around 2%, discussion should gradually turn to how fast rates ought to climb from this point, rather than whether any further normalisation is warranted.