BOJ may signal underlying inflation has hit 2% goal: sources

The Bank of Japan (BOJ) may indicate in the coming months that underlying inflation has likely reached its 2% target, according to three sources familiar with the central bank's thinking. This potential announcement, while largely symbolic, would strengthen market expectations for a December interest rate hike and demonstrate the BOJ's continued willingness to raise rates in short intervals.

The central bank has recently begun emphasizing the need to anchor underlying inflation near its target when determining the timing and pace of future rate increases.

Following a 31-year high key rate increase last month, the BOJ is cautious about delivering another rate hike this month, preferring to gather more data on the impact of past rate hikes on domestic financial conditions. Recent data, including Tokyo consumer inflation and the quarterly "tankan" business survey, have bolstered the BOJ's confidence that underlying inflation has roughly hit its 2% target.

However, the tankan also revealed that corporate inflation remains stagnant, reducing pressure for an immediate policy response.

Inflation expectations are still high but not surging, suggesting that while inflation risks persist, they are not accelerating sharply. The BOJ raised its key rate in September and Governor Kazuo Ueda has signaled that the central bank is now focused on preventing underlying inflation from surpassing its target, potentially leading to tighter policy measures. The BOJ's September hike followed one in June, prompting market projections of quarterly rate increases.

While a further depreciation of the yen could pressure the BOJ to raise rates again in October, the possibility of a US rate increase this month has somewhat eased that pressure, according to analysts. Despite these developments, the BOJ remains committed to mitigating inflationary risks with another near-term rate hike. In September, BOJ Governor Kazuo Ueda stated that underlying inflation, which excludes one-off factors, was close to 2%, with some members believing it would reach that level "in no time."

Ongoing rises in wholesale and consumer inflation, coupled with steady wage growth and increased crude oil prices, have heightened the likelihood of underlying inflation persisting around the 2% target.