Daiwa: BOJ's focus turns to keeping inflation at 2%, wages key

Daiwa's view is of a central bank that is taking its time but still has more rate moves to make, a posture that should underpin the yen whenever wage gains look increasingly durable. If the BOJ holds at its 29-30 October gathering and at the same time raises its inflation view, a hike in December would stay on the table, and yields on short-dated JGBs could climb. Crude is an important variable. Higher oil has already pushed import prices up again, Daiwa observes, and an additional surge tied to the Iran conflict would heighten the danger of inflation running above target, making swifter tightening more likely. On domestic stocks, a series of measured increases combined with robust capital spending should not knock the market off course, although a quicker tightening path would put valuations under pressure. Longer-term JGBs, whose yields have already moved past 3%, still respond sharply to any change in the central bank's message.

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The BOJ spent decades trying to drive inflation to 2%; its challenge now, in Daiwa's view, is keeping it there, and the outcome of next spring's wage talks will provide the answer.

Key points:

• According to Daiwa, the BOJ is no longer aiming to push underlying inflation up to 2% but to hold it around that mark.
• On 16 October, Governor Kazuo Ueda said underlying inflation is broadly near 2% and any additional climb cannot be accepted.
• The central bank is seen keeping its 1.25% policy rate at the 29-30 October meeting, while possibly revising up its inflation view; a December move has reportedly not been taken off the table.
• Rengo, the country's biggest trade union federation, may demand wage increases of 5% or more in 2027 for a fourth consecutive year, aiming for 6%.
• The persistence and spread of pay increases, smaller companies included, will determine when the BOJ next moves, Daiwa argues.
• Crude's climb has started pushing import costs up once more, heightening the inflation threat.

Daiwa Securities describes the BOJ as entering a fresh stage: the objective is no longer moving inflation to 2% but maintaining it there, and how long-lasting wage growth proves will shape the schedule of future rate rises.

Speaking to reporters on 16 October, Governor Kazuo Ueda said underlying price growth is more or less at 2% and that any further uptick would be unacceptable. His comments suggested the BOJ, which once tolerated underlying inflation moving up toward its goal, now makes holding it steadily at about 2% a key policy aim. For Daiwa, those remarks confirm the change it had already spotted: policy has moved from pursuing 2% inflation to keeping it stable at that level.

At the 29-30 October gathering, Ueda said, the board will examine thoroughly whether underlying inflation has arrived at 2%. Daiwa, citing reports, expects the BOJ to hold its policy rate at 1.25% this time while possibly lifting its assessment of underlying inflation to broadly around 2%. That would not count as an immediate achievement of the price target, and with financial conditions still accommodative, the BOJ is seen continuing to raise rates; a December move has reportedly not been excluded.

Daiwa sees little reason to hurry further rate increases: household spending is still soft, while corporate investment continues to hold up. Core machinery orders climbed 5.2% in August, a sign of resilient capital spending, including AI-related areas. Daiwa also argues that upward price pressure has not clearly softened. Corporate goods prices in September rose 6.8% from a year earlier, down from 7.6% in August yet still high; import prices, meanwhile, have started to climb again as crude has become more expensive.

Daiwa regards next spring's wage negotiations as the crucial gauge of whether inflation has taken root. Japan's biggest union federation, Rengo, is reportedly weighing demands for increases of at least 5% in 2027, which would mark a fourth consecutive year at that threshold; for smaller businesses it wants an even higher target of 6% or more, with about 6% the overall aim. This year's bargaining produced increases of roughly 5% overall, while smaller firms saw less, about 4.7%.

The key, according to Daiwa, is not only the headline number but whether sizeable increases turn into a permanent pattern and extend from big firms down to smaller ones. Over the coming months more detail should appear, from Rengo's basic plan in October to the business lobby Keidanren's position in November, giving the BOJ a clearer picture by its December meeting.

At this stage, Daiwa sees the October gathering focusing on how the BOJ judges underlying inflation; the strength of wage and price momentum, along with hints of an overshoot, will determine when and how fast it hikes thereafter.