The Bank of Japan kept interest rates unchanged, Friday, at 1.25 percent, but announced that core inflation had reached levels consistent with its target of 2 percent, in a pivotal shift in the course of its monetary policy after a battle that lasted about 14 years to reach this goal, warning at the same time of the risks of inflation exceeding the target levels, indicating the possibility of raising interest rates again as soon as December.
The central bank said that its focus in the next stage will be on stabilizing core inflation around the 2 percent level, confirming that its monetary policy has entered a new, more stringent phase that allows for raising interest rates once every few months, according to Reuters.
However, Bank of Japan Governor Kazuo Ueda stressed that reaching core inflation levels consistent with the target does not mean that the bank has achieved its ultimate goal, explaining that the goal is to reach sustainable and stable inflation at 2 percent, and to consolidate expectations around this level.
Ueda said, during a press conference following the monetary policy meeting, that the bank saw the need to conduct further scrutiny of economic and price risks, in addition to financial conditions, which prompted him to keep interest rates unchanged. He added that financial conditions are still accommodative, but there are several risks that push prices to rise, stressing the need to be vigilant about the possibility of exceeding the target inflation.
The broad shift in the bank’s orientations is consistent with the path of its American and European counterparts, who are anticipating soon increases in interest rates to confront the risks of inflation resulting from the artificial intelligence boom and the shock caused by the war with Iran in energy markets.
In a surprising move that represents a further departure from the ultra-loose monetary policy, the Bank of Japan announced an acceleration of the pace of sales of exchange-traded funds it owns, starting from January, bringing annual sales to 860 billion yen ($5.45 billion), compared to about 330 billion yen currently.
The bank said in its quarterly forecast report that core inflation has reached a level that is generally consistent with its target, and is expected to remain at levels close to it, adding that the next stage requires assessing the extent of inflation’s entrenchment around the 2 percent level.
At the conclusion of a two-day meeting, the bank kept the interest rate at 1.25 percent, in a move that was widely expected, avoiding implementing two successive increases to allow more time to study the impact of previous increases in interest rates on lending conditions.
Hard-line board member Hajime Takata opposed the decision to fix the interest rate, proposing to raise it to 1.5 percent, but his proposal was not approved.
Regarding the inflation path, Ueda said that the bank will look at a range of indicators, but will focus more on the mechanisms and factors behind price movements, especially the extent to which medium- and long-term inflation expectations are anchored around the target.
He stressed that the bank will not only wait until inflation takes hold at the target level, but will make appropriate adjustments to monetary policy to achieve this. He pointed out that there are still upward risks to prices that cannot be ignored, but he ruled out that these risks have witnessed a sharp increase compared to what they were about a month ago.
He added that inflation expectations in Japan have not yet been established around the target, but making appropriate adjustments to monetary policy could achieve progress in this direction, especially in light of the upward risks to prices.
He explained that the bank will evaluate the likelihood of the basic scenario of its expectations being achieved, along with the risks surrounding it, during each monetary policy meeting, including the next meeting.
Regarding the impact of previous increases in interest rates, Ueda said that the bank will be able to respond to upside and downside risks when interest rates reach levels considered neutral for economic activity, but he pointed out that it is difficult to determine the timing of reaching these levels. He added that the bank will take into account the cumulative effect of previous increases, which requires continued scrutiny of the financial conditions.
In its quarterly report, the Bank of Japan raised its forecast for core consumer price inflation during the fiscal year ending in March 2028 to 2.6 percent, compared to its forecast of 2.4 percent three months ago. It also raised its estimate for what is known as core core inflation, which excludes the impact of fuel costs, over the next two fiscal years.
The central bank also indicated that long-term inflation expectations are “moving around the 2 percent level,” indicating its firm belief that sustainable increases in prices and wages have become more present in citizens’ expectations.
The bank had stated in its previous report issued in July that core inflation was approaching its target of 2 percent, with long-term inflation expectations gradually rising.
The bank said in its latest report that the previous stage required great attention to the risks of falling prices, but circumstances have changed, and the focus in the next stage has become focused on preventing core inflation from exceeding its target of 2 percent.
While the bank maintained its assessment that financial conditions remain accommodative, it noted that real interest rates have been rising recently, despite their continued decline in the short term. The July report described real interest rates as negative, especially in the short and medium term.
The bank’s announcement that inflation has reached levels consistent with its target of 2 percent represents a turning point in its journey, after it spent most of its history facing weak or declining price growth, since it obtained its legal independence from the government in 1998.
During the term of former Governor Haruhiko Kuroda, the Bank of Japan launched a massive monetary stimulus program in 2013, with the aim of pulling the country out of the deflation spiral and stimulating inflation to reach the 2 percent target.
Even after ending a mix of unconventional monetary easing measures in 2024, the bank remained cautious in raising interest rates, based on its belief that core inflation, or price movements excluding temporary factors driven by domestic demand, remains below target.
As energy costs continued to rise and import prices increased due to the weak yen, the bank raised interest rates in September, after a previous increase in June, in a shorter period of time than the pace that saw approximately two increases annually during 2024 and 2025.
In a related context, Ueda said that the data showed that core inflation is heading towards stability at the level of 2 percent, indicating the emergence of clear indications that the impact of rising costs of energy and raw materials resulting from the conflict in the Middle East has been transmitted to trading prices between companies.
He added that the September and October data show the expansion of upward pressures to include consumer prices as well, explaining that these factors contribute to pushing core inflation higher.
Most analysts polled by Reuters expect the Bank of Japan to raise the interest rate to 1.5 percent during December, followed by additional increases next year. Their expectations for the final level of interest rates are around a range of 1.75 to 2 percent.
However, rising prices may put pressure on consumption, as it prompts Japanese families, many of whom have not experienced large waves of rising prices during their lives, to search for discounted goods and limit spending.
The performance of Asian stocks was mixed on Friday, amid growing concerns about the future of artificial intelligence, after a decline in Alphabet shares led to pressure on US markets.
In Japan, the Nikkei 225 index fell by 2.3 percent during afternoon trading, reaching 63,155.94 points. At the conclusion of a two-day meeting, the Bank of Japan decided to keep the key interest rate unchanged at 1.25 percent, in a move that was widely expected, after the central bank raised interest rates last month, according to the Associated Press.
The United States is pressuring Japan to raise interest rates, amid concerns about the weakness of the yen. In the currency market, the US dollar rose slightly to 157.67 yen, compared to 157.65 yen. The euro also rose to $1.1186, compared to $1.1181.
In Australia, the Standard & Poor's - ASX 200 index rose 0.2 percent to 8,908.10 points. On the other hand, the South Korean KOSPI index fell by about 4 percent to 5,701.71 points, with shares of SK Hynix and Samsung Electronics declining.
Shares related to artificial intelligence witnessed notable fluctuations, as the growing interest in this technology led to a rise in the shares of several companies, including chip manufacturers, before they declined due to concerns related to factors including supplies.
In Hong Kong, the Hang Seng Index rose by 1.7 percent to 23,359.06 points, while the Shanghai Composite Index fell by 0.4 percent to 3,636.60 points.
On Wall Street, the Standard & Poor's 500 index fell by 0.3 percent, recording its first loss in four days, despite the rise of the majority of stocks listed on it and in the American markets in general. The Nasdaq Composite Index fell by 1.4 percent, while the Dow Jones Industrial Average fell by 132 points, or 0.3 percent.
The stock of Alphabet, the parent company of Google, was one of the most prominent factors pressuring the market, given its great weight on Wall Street as one of the largest listed companies. The company's Class A shares fell by 12.6 percent, recording its worst daily performance since it began trading more than 20 years ago.
At the end of Thursday's trading, the Standard & Poor's 500 Index lost about 23.59 points, closing at 7,720.39 points, while the Dow Jones Industrial Average fell by 132.54 points to 52,342.56 points, and the Nasdaq Composite Index fell by 365.13 points to 26,184.72 points.
In the bond market, the yield on 10-year US Treasury bonds fell to 4.94 percent, compared to 5.05 percent at the end of Wednesday’s trading. The yield continues to decline in general since it exceeded 5.30 percent earlier this month, when it recorded its highest level since 2002.
In energy markets, US crude futures rose by 1.15 percent to $103.17 per barrel, while Brent crude, the global standard, rose by 1.05 percent to $116.09 per barrel.
