The Bank of Japan declared that Japan’s underlying inflation is “generally consistent” with its 2% target, its first assessment since adopting the target in 2013.
The Bank of Japan had previously stated that the underlying inflation rate was “approaching 2%.”
This comes after the central bank was expected to keep interest rates unchanged at 1.25%, the highest level since 1995.
The resolution was split 8-1, with board member Hajime Takada voting against it. Takata wanted the bank to raise its policy rate to 1.5%.
The Bank of Japan also raised its fiscal 2027 inflation forecast to 2.6% from 2.4%, and raised its so-called “core-core” inflation forecast to 2.7% from 2.6%. “Core-core” inflation strips away the prices of fresh food and energy.
He also pointed to the risk that underlying inflation could deviate upward beyond 2%, saying, “Business behavior is shifting more towards raising wages and prices, and there are a variety of factors that could push prices higher.”
Describing this as a “hawkish hold,” Krishna Bhimavarapu, Asia-Pacific economist at State Street Investment Management, said the Bank of Japan expects more rate hikes to come and is increasingly confident that its goals will be met through a “self-sustaining wage-price-consumption cycle.”
However, he added that the country’s growth does not justify rushing the next move.
Bhimavarapu expects Japan’s GDP growth to likely lose momentum in the third quarter, with consumption still in the weakest part of the economic cycle.
A CNBC survey of 16 economists conducted before the decision found that all of those surveyed expected the Bank of Japan to be ready to raise interest rates in December or next January, as domestic inflation and wages continue to rise.
Thirteen respondents said they expected the terminal interest rate, the level at which the Bank of Japan is expected to end its tightening cycle, to be between 1.75% and 2% by around mid-2027.
Japan is suffering from a weak yen and soaring energy prices, which are pushing up inflation.
However, experts told CNBC that energy subsidies from the Takaichi administration are suppressing the CPI numbers.
The latest inflation figures for September show core inflation will reach its highest level in 2026 at 2.1%, higher than expected.
Earlier this month, Finance Minister Satsuki Katayama reportedly told parliament that Japan was “moving toward a period of sustained inflation driven by wage increases.”
According to the latest government statistics, Japan’s inflation-adjusted wages rose for the eighth straight month in August, rising 1.5% from a year earlier, suggesting the possibility of inflation due to higher wages.
—CNBC’s Lisa Kim contributed to this report.
