Takata Proposes 1.5% Rate, Bank of Japan Holds at 1.25% in 8-1 Vote

Key Facts

The Bank of Japan kept its overnight rate guidance at around 1.25% at its October 30 meeting, with 8 members voting to hold and one dissenting: Hajime Takata. Takata proposed that the bank target an overnight rate of around 1.5%, according to the bank's decision, in a lone objection to the policy path approved by the majority. The member said, "Core inflation, as measured by the consumer price index, has reached the price stability target, and the situation has entered a new phase." The vote puts him in favor of faster tightening, but did not change the adopted interest rate. The decision coincided with the release of new economic and price forecasts that reflect inflation remaining near the target, with risks to the upside.

The bank raised its median forecast for core inflation, excluding fresh food, in fiscal 2027 to 2.6%, up 0.2 percentage points from its July report estimate. It put inflation at 2.5% in fiscal 2026 and 2.0% in 2028, indicating that it expects pressures to remain above the 2% target in 2027 before easing later. The bank said price risks are tilted to the upside and core inflation could move above the 2% price stability target. It linked this possibility to a shift in companies' behavior toward raising wages and prices, which could make the pass-through of cost increases to consumers more persistent. These risks are consistent with Takata's rationale that reaching the target calls for moving toward the neutral interest rate at a faster pace.

The bank identified rising crude oil and other commodity prices, as well as a weaker yen, as factors that could accelerate inflation in the first half of the projection period. It expects inflation to later decline toward 2% in the second half as the effect of higher crude oil prices fades. This path places inflation expectations between near-term pressures driven by energy and commodity costs and the exchange rate, and a later easing as some of those effects dissipate. The bank also cut its estimate for real gross domestic product growth in fiscal 2027 to 0.7%, down 0.1 percentage points from its July report. It expects growth of 0.7% in 2026 and 0.8% in 2028, a path combining temporarily above-target inflation with modest growth.

Takata proposed targeting an overnight rate of around 1.25% at the July meeting, and his proposal was also rejected then, making his current 1.5% proposal an extension of his repeated calls for tighter policy. In a speech in September, he noted that the producer price index rose 7.2% year on year in July and said this posed upside risks to prices. He said high wage increases for three consecutive years, in 2024, 2025 and 2026, support expectations that increases will continue in 2027. In the labor market, Japan's seasonally adjusted unemployment rate was 2.4% in September, down 0.1 percentage points from the previous month. These figures provide context for the board's discussion of the continued pass-through of wage and cost pressures to prices.

The Bank of Japan scheduled publication of the full text of its Outlook for Economic Activity and Prices on November 2, with a summary of opinions from the October meeting due on November 10. The minutes of the October 29-30 meeting are scheduled for December 23, according to the bank's calendar, providing access later to details of the discussion among members. The available stock market reading on Friday morning, before the meeting decision was released, showed the Nikkei 225 down 2.6% at 62,960.60 points. That reading came as the bank was concluding its meeting, and therefore preceded the announcement of the decision and vote. The full outlook report and the summary of opinions are the next two releases likely to provide details on the inflation path and divisions within the board.