Bank of Japan expected to hold rates at 1.25%, may raise inflation forecasts

Key Facts

Sources told Reuters they expected the Bank of Japan to leave interest rates unchanged at its next meeting, maintaining the target for the uncollateralized overnight call rate at around 1.25% set in its latest decision. The expected hold comes amid the possibility of an upward revision to forecasts for core inflation, which excludes fresh food prices, for fiscal 2027. The sources linked the potential revision to renewed gains in oil prices, which would add to price pressures. But they said renewed yen weakness, and the resulting increase in import costs and inflation, could alter the upcoming decision. The expectation of unchanged rates therefore remains conditional on currency movements and the cost of imported goods, according to the sources.

The bank's median forecasts issued in July projected real gross domestic product growth of 0.8% in fiscal 2027 and inflation excluding fresh food of 2.4%. For fiscal 2026, the median forecast for real growth was 0.6%, compared with an inflation estimate of 2.5%. Those projections meant the path outlined by the bank in July combined higher growth and lower inflation between the two fiscal years. Reuters' sources expect the upcoming adjustments to remain limited, saying "any revisions will be minor." The sources linked that assessment to the absence of strong evidence that a spiral of sharp, mutually reinforcing wage and price increases was taking hold.

Concerns about energy costs are consistent with the bank's assessment in its latest monetary policy statement, which linked rising producer price pressures to higher oil prices and a weaker yen. The bank added expanding demand related to artificial intelligence to the factors fueling those pressures. On economic activity, Reuters' sources expected growth estimates to remain largely unchanged in the upcoming review. They said strong exports of AI-related goods were offsetting weak consumption, supporting activity estimates despite subdued domestic spending. Demand related to the sector thus features both in the bank's assessment of producer price pressures and in the sources' explanation of continued export support for growth.

The upcoming meeting follows an earlier decision approved by the Policy Board by 7 votes to 2, according to the Bank of Japan's statement. Asada and Sato opposed the decision because they preferred not to raise rates at that meeting. In assessing the price outlook, the board's Summary of Opinions included a view that "underlying consumer price inflation is now very close to 2%." However, the contributor also noted the difficulty of concluding definitively that underlying inflation had already reached the target. That assessment places inflation's proximity to the target alongside continued caution about confirming it has been reached, while the vote showed opposition to the timing of the previous hike.

Also in the board's Summary of Opinions, another view pointed to continued weakness in private consumption in Japan. It noted that the pace of services price increases had stabilized recently, adding a price dimension to the assessment of domestic demand. In its formal monetary policy guidance, the bank said it would continue raising the policy rate in line with developments in economic activity, prices and financial conditions. Reuters' sources did not rule out another hike in December, despite expecting rates to remain unchanged at the next meeting. That remains a possibility the sources attribute to the future policy path, alongside the bank's stated commitment to tie its actions to developments in the economy, inflation and financial conditions.

The upcoming schedule begins with the release of national inflation data for September on October 23, according to Japan's Statistics Bureau calendar. The Bank of Japan holds its monetary policy meeting on October 29 and 30, according to the bank's official schedule. Also on October 30, the Statistics Bureau releases the preliminary reading of Tokyo inflation for October, coinciding with the final day of the meeting. That day, the bank publishes the basic views in its Outlook for Economic Activity and Prices report, including its upcoming assessment of the economy's trajectory. The full text of the Outlook Report is scheduled for publication on November 2, according to the Bank of Japan's release calendar.