The Bank of Japan is expected to keep the overnight call rate unchanged at 1.25% today, allowing more time to assess the impact of its September rate hike. The key focus is whether the BOJ will acknowledge that its 2% inflation target, set in 2013, has finally been achieved. The BOJ’s measure of underlying CPI, which excludes fresh food, energy and institutional factors, rose to 2.7% yoy in September, while one-year inflation expectations stood at 2.6% in the 3Q Tankan survey. Base wage growth has reached nearly 4% yoy, and Rengo is reportedly targeting total wage increases of at least 5%, with an aspirational goal of 6%, in 2027. Together, sustained underlying inflation and robust wage growth suggest that Japan is making progress towards a self-sustaining wage-price cycle, strengthening the case for the BOJ to acknowledge that its 2% inflation target has been achieved in the quarterly outlook report at this meeting.
Acknowledgement that the 2% inflation target has been achieved would strengthen the case for further monetary policy normalization, including a 25bps hike to 1.50% in December and further increases towards 2% by mid-2027. We currently forecast the policy rate to reach 1.75% by 2Q27, with risks tilted to the upside.
Monetary policy normalization should provide structural support for the JPY. USD/JPY has retreated from a peak of around 163 in late July to 157 in late October, while net non-commercial JPY positions have turned positive, suggesting that carry-trade unwinding is underway. Meanwhile, Japan recorded net outflows from foreign long-term debt securities for five consecutive weeks from September 13 to October 11, totalling JPY3.4tn. Although still an early signal, these flows may indicate that Japanese financial institutions are beginning to shift portfolio allocations towards domestic assets as rising yields improve the relative attractiveness of JPY-denominated investments.
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