For a country that spent much of three decades worrying about falling prices, Friday was a landmark. Japan’s central bank now judges underlying price growth to be “generally consistent” with its 2% aim, wording it had never used in the thirteen years since that aim was adopted. Until now its statements had only spoken of prices moving closer to the mark.
Policymakers nevertheless left the short-term rate unchanged at 1.25%, already the highest level since 1995. The vote was not unanimous. Board member Hajime Takata wanted to move straight to 1.5% and was outvoted eight to one.
Governor Kazuo Ueda said the board preferred to look harder at how earlier increases were feeding through to lending before acting again. He was clear, though, about where the risks lie, telling reporters the bank had to stay alert to inflation running above target. Its fresh projections point the same way, lifting expected core inflation for fiscal 2027 to 2.6% from the 2.4% pencilled in over the summer.
There was also a surprise for markets. From January the central bank plans to sell off its stockpile of exchange-traded funds much faster, at a pace of 860 billion yen a year instead of 330 billion. It is another step away from the era of ultra-cheap money that defined Japanese monetary policy for a generation.
Several forces are pushing prices up at once: a weak yen, energy costs inflated by the war involving Iran, and wages that are finally climbing. Real pay rose for an eighth straight month in August. Economists polled by CNBC all expect the groundwork for the next hike to be laid in December or January, and most see the policy rate peaking somewhere between 1.75% and 2% by mid-2027.
