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

Tokyo's Bank of Japan (BOJ) may suggest this month that underlying inflation has reached the 2% target, according to three sources familiar with the bank's stance, signaling the possibility of a rate hike in the upcoming months. This announcement, while largely symbolic, would align with market expectations for a December rate increase and demonstrate the BOJ's readiness to continue raising rates in short intervals.

The central bank has been emphasizing the importance of anchoring underlying inflation around its target when determining the timing and pace of further interest rate hikes. The BOJ, which recently increased rates in September, appears cautious about delivering another hike this month, preferring to wait for more data on the impact of past rate increases on domestic financial conditions.

Recent data, including Tokyo consumer inflation and the quarterly "tankan" business survey, may be bolstering the BOJ's confidence that underlying inflation has roughly reached the 2% target. However, the "tankan" survey also indicated that corporate inflation is stagnant and not rising significantly, reducing pressure on the BOJ to deliver a back-to-back rate hike.

One source noted that "inflation expectations remain elevated but not flaring up," indicating that while inflation risks persist, they are not accelerating sharply. Another source echoed this view, stating that "prices are moving in line with the BOJ's projections." The sources spoke anonymously due to non-authorization for public statements.

The BOJ raised its key rate to a 31-year high last month, with Governor Kazuo Ueda indicating that the central bank has entered a phase focused on preventing underlying inflation from exceeding its target, potentially leading to tighter policy in the future. The recent rate hike followed one in June, leading markets to anticipate the BOJ raising rates roughly once every quarter.

Although a weakening yen could push the BOJ to raise rates again in October, the declining likelihood of a US rate increase this month has somewhat alleviated pressure on the BOJ to hike rates again. The BOJ remains committed to mitigating inflationary risks with another near-term rate increase. In September, the governor stated that underlying inflation, which excludes one-off factors and represents a broad, demand-driven price trend, was close to 2%.

Additionally, a recent report highlighted factors such as rising wholesale and consumer prices, steady wage growth, and increasing crude oil prices as contributing to the prospects of underlying inflation persisting around the BOJ's target. The BOJ will likely reference these factors in a quarterly report following its next policy meeting on October 29-30, the sources explained.