MNI POLICY: Underlying Inflation Key For BOJ's Slow Hikes

The Bank of Japan is expected to keep “underlying” CPI inflation as its key gauge for policy, allowing it to move cautiously on rate hikes and making a lift this year increasingly unlikely, MNI understands.

Governor Kazuo Ueda has stressed that the risk of raising rates too early outweighs the risk of inflation or of falling behind the curve. “I don’t think we are behind the curve, or that the risk of us being behind the curve is large,” he said on July 31, following the board's decision to hold the policy rate at 0.5%. (See MNI BOJ WATCH: Ueda Says To Gradually Raise Rates)

While underlying CPI – domestic demand-driven price rises – remains short of the BOJ’s 2% target, giving officials room to hold off on tightening, they acknowledge the Bank would have to lift rates once it stabilises at around 2%.  

One board member has argued for shifting communications away from underlying inflation toward actual price developments, the output gap and inflation expectations. But bank executives continue to lean on the “underlying” concept as a useful signal to justify caution.

Markets have priced in a 48% chance of a 25 basis point hike at the Oct 30-31 meeting, but officials are unlikely to have enough evidence by then. Japan’s CPI has held above 2% for more than three years, yet the BOJ sees underlying inflation slowing temporarily before edging toward target in fiscal 2026.

Additional guidance will come from the September Tankan survey on Oct. 1 and the Bank’s branch managers’ meeting in mid-October, but the impact of U.S. trade policies on global and Japanese growth will remain difficult to assess. Third-quarter GDP is due Nov. 17, followed by the December Tankan on Dec. 15.