BOJ may signal underlying inflation has hit 2% goal, sources say

The Bank of Japan may announce in October that underlying inflation has likely reached its 2% goal, according to three sources familiar with the central bank's perspective. This would be largely symbolic, but it would support expectations of a December rate hike and demonstrate the BOJ's willingness to continue raising interest rates in short intervals.

The central bank has recently stressed the importance of anchoring underlying inflation around its target when determining the pace and timing of further interest rate increases. With just a September rate hike, many within the bank are cautious about another increase this month and prefer to wait for additional data on the impact of past rate hikes on domestic financial conditions.

Recent data, such as Tokyo consumer inflation and the quarterly tankan business survey, may be bolstering the BOJ's confidence that underlying inflation has reached its 2% target. However, the tankan also shows corporate inflation remaining stagnant, reducing pressure for an immediate policy response. While inflation expectations are still elevated but not surging, a third source noted that this suggests underlying inflation is now roughly at its target.

Inflation is moving in line with the BOJ's projections, indicating that underlying inflation is approximately at the target, as a third source added. The sources spoke anonymously due to lack of authorization for public statements. The BOJ raised its key rate to a 31-year high last month, with Governor Kazuo Ueda indicating the central bank has entered a phase focused on preventing underlying inflation from overshooting its target, potentially leading to tighter policy.

The September hike followed another in June, prompting markets to project the BOJ raising rates roughly once every quarter. A weaker yen could pressure the BOJ to hike rates again in October, but subdued prospects of a US rate increase this month are easing some pressure, according to analysts. Regardless, the BOJ remains committed to preventing inflationary risks with another near-term rate hike.

In raising rates in September, the governor stated that underlying inflation, which excludes one-off factors, was close to 2%. Opinions at the September meeting suggested some members believed underlying inflation was close to 2% or would reach that level soon. With rising wholesale and consumer inflation, steady wage increases, and higher crude oil prices, the BOJ's prospects for sustained inflation around its target are growing.

The BOJ may cite these factors when signaling in a coming report that underlying inflation has roughly hit its goal, following its next policy meeting on October 29-30. The central bank's July report projected underlying inflation would reach levels consistent with its 2% target between October and March 2028.