Katayama Affirms Alignment With Bank of Japan After Rate Increase to 1.25%
Key Facts
Japanese Finance Minister Katayama told parliament that the government's outlook was aligned with the Bank of Japan's, in remarks addressing inflation and the impact of tax cuts on demand, according to Reuters. "I see no gap," she said, reiterating her position on the relationship between the government's outlook and the central bank's. She attributed current price increases to higher import costs, while saying Japan's economy was approaching a stage of sustainable inflation driven by wage growth. She also acknowledged that tax cuts typically fuel inflation by stimulating demand for goods and services. She pledged that fiscal policy would expand Japan's production capacity without accelerating inflation, making increased supply part of the government's approach to price pressures.
The Bank of Japan raised its policy rate to around 1.25% in its September decision, from around 1.0%, according to its official statement. The new guideline for money market operations took effect on September 24, 2026, according to the decision statement. In outlining factors supporting economic activity, the bank cited growing global demand related to artificial intelligence. It also pointed to a continued rise in medium- and long-term inflation expectations in its assessment of price developments in Japan's economy. The bank's assessment thus combined support from global demand related to artificial intelligence with a sustained rise in price expectations extending beyond the near term.
The September rate increase was approved by 7 votes to two, according to the Bank of Japan's statement on the voting outcome. Asada explained his dissent by saying the strength of economic conditions was not sufficiently certain and that retaining the previous guideline for money market operations was preferable. The summary of opinions from the September meeting also included a view that domestic demand growth was negative, while external demand made a positive contribution. That view attributed the contribution from external demand to a decline in imports caused by supply constraints related to the Middle East. In a Reuters poll, 23 of 32 respondents who answered a question about dissent within the board said renewed dissenting votes at the next rate increase could weigh on the yen.
On prices, a separate Reuters poll forecast that Japan's annual core inflation would rise to 2.1% in September from the August reading. The previous reading for the measure was 1.7%, according to the agency's coverage of expectations for the forthcoming Japanese inflation data. The coverage attributed pressure on households to higher energy prices linked to the conflict in the Middle East. Annual wholesale inflation rose to 6.8% in September, according to figures Reuters cited in the same report. Conflict-related energy price increases are adding to cost-of-living pressures, alongside expectations of accelerating core inflation and the minister's remarks on the impact of higher import costs on current prices.
On the future path of interest rates, 54 of 78 economists surveyed by Reuters in October expected an increase in the final quarter of 2026. A majority of economists in the poll forecast that Japan's policy rate would reach 1.50% in December, following the increase approved in September. Further ahead, 39 of 65 analysts who answered a question about the expected level by the end of next June forecast a rate of 1.75%. This group represented 60% of respondents to that question, according to the results of the poll on Japan's monetary policy outlook. The share expecting the terminal rate in the tightening cycle to reach 2.00% or higher also rose to 51% of participants responding to that question.
The next scheduled releases begin with Japan's national inflation data for September on October 23, according to the Japanese Statistics Bureau's published calendar. Following that release, the Bank of Japan will hold its next monetary policy meeting on October 29 and 30, according to its official meeting schedule. The bank is scheduled to release its basic outlook for economic activity and prices on the final day of the meeting. That coincides with the release of preliminary October inflation data for the Tokyo area, scheduled for October 30, according to the Statistics Bureau. The final day of the monetary policy meeting will therefore bring together the bank's basic outlook for the economy and prices and a new preliminary reading on Tokyo inflation.