Daiwa sees BOJ hold in October, but 2% inflation call keeps December hike in play

Market reaction is likely to hinge on the central bank's language rather than the widely expected rate hold. A combination of factors, including a formal acknowledgement that underlying inflation has hit 2%, a dissenting vote from Takata and wording from Ueda pointing to the 'next meeting', would be seen as hawkish, strengthening the yen and lifting short-end yields as December gets priced in. Elevated crude prices pose a major upside risk, with oil already stoking upstream cost pressures and amplifying the BOJ's fear of inflation running hot. If Ueda sounds a cautious note and focuses on a broad review of conditions, December pricing could be dialled back and the yen could weaken.

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The central bank is seen holding fire on rates, even as it resets its objective from raising inflation to 2% to preventing it from overshooting that level, a shift that leaves a December move very much on the table.

Key projections from Daiwa:

• The BOJ will keep its policy rate unchanged at the October gathering, supported by softer inflation expectations from households and firms.
• The board is seen judging that underlying inflation is at 2%, shifting the priority from achieving that level to stabilising around it.
• Board member Hajime Takata may again argue for a rise, while Naoki Tamura is expected to back a pause after the September move.
• FY26 GDP growth forecast seen raised to 0.8% from 0.6%, FY27 core CPI lifted to 2.5% from 2.4%, and FY26 core-core CPI trimmed to 2.4%.
• Higher crude oil has revived upstream pressures, with the BOJ's policy rate already above the floor of its estimated neutral range of 1.0% to 2.5%.
• Governor Ueda's remarks will be watched for a shift from 'every meeting' language, which would hint at a December hike.

The Bank of Japan is widely anticipated to hold rates steady in October, although the meeting could still represent a meaningful pivot in strategy, Daiwa Securities says. The brokerage forecasts that policymakers will determine underlying inflation now matches the 2% target, shifting the bank's stance from pushing inflation upward to holding it steady.

According to Daiwa, press reports indicate the economy and prices are broadly following the BOJ's projections. Policymakers see no need for a consecutive rate rise given the muted upside risks. October surveys pointed to declining inflation expectations. Nonetheless, there is significant unease about an overshoot. The pass-through of costs to consumers is widening, and mounting crude prices are generating fresh upstream strain, with some BOJ officials expecting the pass-through to gather pace in 2025.

Earlier in October, Ueda indicated the shift himself, stating that with prices near 2%, the bank cannot accept further rises and aims to stabilise. Daiwa believes the Outlook Report will describe inflation as broadly consistent with the target. If it maintains that upside risks remain, that would justify a near-term increase.

Board member Takata is expected to repeat his dissent from July and vote for an increase, pointing to robust global demand. Tamura, who has advocated gradual increases toward a 2% neutral rate, is thought to favour pausing after the September rise.

Daiwa sees the board upgrading its FY26 GDP estimate to 0.8% and raising FY27 core inflation to 2.5%, partly because of oil. It also expects a small cut to FY26 core-core CPI to 2.4%. The planned reduction in the food consumption tax will likely be excluded, but Daiwa reckons that could trim core CPI by around 1.5 percentage points in FY27.

The post-meeting press conference with Ueda is crucial. The focus is on whether he shifts from 'every meeting' to 'next meeting' phrasing, which would be interpreted as a strong December indicator. Given the policy rate sits above the floor of the neutral estimate, Ueda's views on financial conditions will drive speculation on the pace of further tightening.