Bank of Japan Summary Sees Neutral Rate Above 1%, Reveals Split on Pace of Rate Hikes

Key Facts

The Bank of Japan published on November 10 a summary of opinions from its October 29-30 meeting, revealing divisions on the timing and pace of rate increases. Some members called for continued increases in the policy rate and a reduction in monetary easing, while others favored holding it steady for now to monitor risks to activity and prices and the cumulative effects of previous increases. One member said the current phase called for "accelerating the pace of bringing the interest rate to the neutral rate." By contrast, another view held that the rate had already entered the estimated neutral-rate range. One member said the rate was "likely to be significantly above 1%," while the summary did not settle the timing of the next increase or a final level for rates.

The disagreement reflects differing assessments of how much progress the bank should make in normalizing monetary policy, rather than agreement on an imminent move. One view held that the bank should reach the neutral rate soon while taking time to adjust the degree of easing, while another stressed the need to accelerate the move toward it. Cautious views take into account the lagged impact of previous increases on activity and prices, as well as risks to the economy and financial conditions. Calls for further increases are linked to an assessment that underlying price pressures may warrant reducing easing. The bank kept its rate at 1.25% at its October meeting, after raising it in September to its highest level in 31 years; a dissenting member voted in October to raise it to 1.5%.

On prices, the bank's summary said the year-on-year rate of increase in the consumer price index had recently entered the 2% to 3% range, and that there was a risk core inflation could rise above the 2% price stability target. It also forecast that the increase in the consumer price index excluding fresh food would exceed 3% near the end of the fiscal year. These projections keep inflation risks in view in discussions of the rate path, while the summary also said higher energy and raw material prices are expected to weigh on economic activity during fiscal 2026. Even so, the bank expected the Japanese economy to continue growing at a moderate, though slower, pace. On these points, the summary does not link board members' views to a specific statement that energy prices alone are driving inflation risks.

Household spending highlights another aspect of the balance facing the bank. Average monthly consumption spending by Japanese households of two or more people was 289,536 yen in September, down 6.8% in real terms and 4.5% in nominal terms from a year earlier. The average forecast by "Mace News" was for a 3.6% contraction in real spending, following an actual decline of 3.1% in August. By contrast, average monthly income for working households rose to 528,074 yen, up 3.4% year on year in nominal terms and 0.9% in real terms. The bank's summary said private consumption, while resilient on the back of improving employment and income, lacked sufficient momentum to drive the economy overall. Weak real spending puts this component of domestic demand at the center of members' assessment of the impact of monetary tightening.

Alongside its rate discussion, the bank decided to accelerate the pace of sales of its exchange-traded fund holdings to about 860 billion yen a year in book value, with the change set to take effect in January 2027. The previous pace of sales was about 330 billion yen a year in book value. The bank said sales began in January 2026 and had proceeded smoothly, with no significant market impact. The decision is a separate channel from the interest rate for reducing the bank's holdings of market-linked assets. The bank is scheduled to publish the minutes of its October meeting on December 23, while its next monetary policy meeting will be held on December 17-18. Most analysts polled by Reuters expected a rate increase to 1.5% in December, while their estimates for the terminal rate ranged from 1.75% to 2%.