Japan's inflation reaches 2% target for first time in 13 years, chances of raising interest rates in December increase

Bloomberg reported that the Bank of Japan (BOJ) kept its policy interest rate unchanged at 1.25% yesterday, in line with general expectations, and announced that underlying inflation had reached the target for the first time since setting the 2% target in 2013. According to reports, this development opens up the possibility of a rate hike at the Bank of Japan's next policy meeting, with a survey showing that more than 80% of economists expect the Bank of Japan to raise interest rates in December.

Bank of Japan President Kazuo Ueda stressed after the policy meeting that the risk of excessive prices must be paid close attention to when making decisions at future meetings. A few hours ago, the Bank of Japan voted 8 to 1 to keep interest rate policy unchanged, while Hajime Takada, the only member to vote against, wanted to raise interest rates to 1.5%.

The Bank of Japan also raised its inflation forecast for fiscal year 2027 to 2.6% from 2.4%. The "core, core" inflation forecast, which excludes fresh food and energy prices, was also revised upward to 2.7% from 2.6%.

The Bank of Japan also warned that underlying inflation may be at risk of exceeding 2%, stating that "corporate behavior has turned more towards increasing wages and prices; there are many factors that may push up prices."

Krishna Bhimavarapu, Asia Pacific economist at State Street Global Advisors, said that the Bank of Japan’s meeting was described as a “tough stance on keeping interest rates unchanged.” It is expected that it will raise interest rates in the future and is increasingly confident that it can achieve its inflation target through the continued “wage-price-consumption cycle.”

The Bank of Japan announced yesterday that underlying inflation has reached the long-sought 2% target. In 2013, the Bank of Japan launched a large-scale stimulus plan and set an inflation target, vowing to reach the target in two years. However, it was not until the Russia-Ukraine war and the war in the Middle East triggered a surge in prices more than a decade later that inflation continued to rise.

Although Kazuo Ueda said that compared with markets such as the United States, Japan's inflation has not yet fully stabilized at 2%, Sony Financial Group economist Tetsuya Inoue said, "reaching this target is a major milestone. However, Ueda still emphasized the risk of rising inflation, suggesting that the next interest rate hike is imminent."

The Bank of Japan is one of the last three major central banks to hold a policy meeting this week, with the Federal Reserve (Fed) and the European Central Bank also keeping interest rates unchanged. Last month, the three major central banks raised interest rates simultaneously for the first time, and the market also expects them to raise interest rates again in December.

After raising interest rates in June, the Bank of Japan raised interest rates again on September 18. It was the first time in this century that interest rates were raised consecutively. It was also the shortest interval between interest rate hikes since 1990. Although Japan's benchmark interest rate is at its highest point in 31 years, it is still low compared with other members of the Group of 7 (G7).