MNI POLICY: BOJ Sees No Need To Rush Rate Hikes

The Bank of Japan sees little need to raise the policy rate unless cost pass-through strengthens and the median forecast for fiscal 2026 core-core CPI rises above 2% from 1.9%, noting minimal risk of falling behind the curve or a wage-price spiral, which also lowers the likelihood of an October hike, MNI understands.

Markets now see a 52% chance of a hike at the Oct. 29-30 meeting after September’s 7-2 decision to keep the cash rate at 0.5%, with board members Naoki Tamura and Hajime Takata dissenting in favour of a 0.75% rate. (See MNI BOJ WATCH: Ueda Says Rate Hikes Will Come; No Timing Hints)

While officials in July expected cost pass-through to selling prices to continue, they now judge momentum has not strengthened. Unless stronger pass-through emerges and the median forecast for fiscal 2026 core-core CPI rises above 2% from the current 1.9%, the BOJ will see no need to raise rates. 

The Bank will publish updated forecasts within the Outlook Report published alongside the October decision.

Some officials also worry that early tightening would derail progress toward the 2% target and risk a return to deflation. Core CPI slowed to 2.7% y/y in August from July’s 3.1%, though it has remained above target for 41 straight months. The underlying inflation rate measured by core-core CPI, excluding fresh food and energy, rose 3.3% y/y in August, slowing from July's 3.4%.

NO RUSH

Officials see no need to rush a rate hike, noting inflation has not accelerated since July and households’ expectations could easily weaken based on past patterns. The BOJ has allowed prices to stay above its 2% target to help anchor expectations at that level.

The Bank also notes services prices – key to achieving the target sustainably – rose 1.5% y/y in August, but lack strong momentum. Officials do not expect them to reach levels that would trigger higher inflation, noting Japan is unlikely to experience the wage-price spiral observed in the U.S. and Europe, given modest union demands. (See MNI POLICY: BOJ 2025 Hike Chances Weak On Wages, U.S. Concerns)

Markets will assess the October decision through upcoming events, including the Oct. 1 September Tankan results and the branch managers' meeting on Oct. 6, Governor Kazuo Ueda’s Oct. 3 speech in Osaka, and speeches by Tamura on Oct. 16 in Naha and Takata on Oct. 20 in Hiroshima.