Bank of Japan to hold rates, signal further hikes

On Friday, the Bank of Japan (BOJ) announced it would keep interest rates at 1.25 per cent, signaling its focus on preventing underlying inflation from overshooting its two per cent target. This stance indicates the central bank is open to raising borrowing costs as soon as December, presenting a shift towards a more hawkish policy phase, according to analysts.

The BOJ's decision aligns with global counterparts, including the US and European central banks, as they consider near-term rate hikes to tackle inflationary risks stemming from the AI boom and energy shock caused by the Iran war. Kazuo Momma, a former BOJ executive and executive economist at Mizuho Research Institute, notes that recent inflation is partly demand-driven due to strong global price pressures from AI investment.

The central bank is expected to maintain its policy rate at 1.25 per cent at the two-day meeting, leaving room for a potential rate hike in December and another in March next year. In its quarterly report, the BOJ may slightly revise upward its price forecast for the next financial year, signaling that underlying inflation has reached its 2 per cent target, as per sources familiar with the matter.

With wage gains becoming embedded and inflation expectations hovering around two per cent, the BOJ will likely emphasize its commitment to anchoring inflation around its target by raising rates towards neutral levels. Markets will closely watch Governor Kazuo Ueda's post-meeting news conference for insights into the pace and timing of further rate hikes.