Bank of Japan to hold rates, signal further hikes

Tokyo, October 30 - The Bank of Japan (BOJ) will maintain interest rates at 1.25 per cent on Friday, but it has signaled that it could raise borrowing costs as early as December. This decision suggests the central bank is entering a more hawkish policy phase and could potentially raise rates again in March. Analysts interpret the BOJ's guidance as a shift from its previous stance, indicating it is now open to raising rates once every few months.

Kazuo Momma, a former BOJ executive and executive economist at Mizuho Research Institute, explains that global price pressures, particularly from the AI boom, are driving inflation, making a portion of it demand-driven. The BOJ's pivot to a more proactive approach aligns it with the policies of the US and European central banks, which are also planning near-term rate hikes to counteract inflationary risks.

The BOJ's decision comes after the two-day meeting where the central bank maintained its policy rate at 1.25 per cent, forego a rate hike to focus on the impact of past rate hikes on lending conditions. The BOJ's quarterly report is anticipated to slightly revise up the price forecast for the next fiscal year, indicating that underlying inflation has reached its 2 per cent target.

Meanwhile, wage gains and inflation expectations around 2 per cent are prompting the bank to emphasize its commitment to anchoring inflation around the 2 per cent target through rate hikes as needed. Markets will closely watch Governor Kazuo Ueda's post-meeting news conference for clues about the timing and frequency of future rate hikes.