BoJ Policy: Consensus Holds Rates at 1.25% Amid Inflation Watch

The Bank of Japan is expected to maintain its policy rate at 1.25% when its two-day meeting concludes on Friday, October 30. A survey conducted by CNBC found that all 16 participating economists and analysts forecast no change to the benchmark rate. This pause follows last month's decision to raise rates to their highest level in 31 years, a move that has led to the current consensus for a temporary halt in tightening.

While the immediate outlook favors a hold, most respondents believe the central bank will prepare the ground for another increase in December or January. Domestic inflation and rising wages continue to climb, providing the basis for further monetary policy shifts. Opinions differ on the timing and necessity of consecutive hikes. Homin Lee, a senior macro strategist at Lombard Odier, stated that macroeconomic conditions support further tightening, but noted that the policy board may lack the consensus for rapid successive moves due to the fragility of the domestic bond market.

Recent economic data indicates firmer price pressures. Japan's core inflation, which excludes fresh food, rose 2.1% in September from a year earlier, marking the highest reading this year. A weak yen is increasing import costs, while elevated energy prices continue to feed through to consumer prices despite government subsidies. Inflation-adjusted wages rose 1.5% year on year in August, representing the eighth consecutive monthly gain.

Finance Minister Satsuki Katayama told lawmakers last week that Japan is on the cusp of shifting to a period of sustained inflation driven by rising wages. She acknowledged that higher import costs are also contributing to price increases. Reuters and The Japan Times have reported that the Bank of Japan is expected to declare its 2% underlying inflation goal met at this week's meeting. Ryutaro Kimura of BNP Paribas Asset Management is watching for a change in the policy statement from saying underlying inflation has been approaching 2 percent to saying it has reached that level.

Currency forecasts suggest stability in the near term. Nine respondents expect the yen to trade between 157 and 158 per dollar over the next month. Three-month forecasts were more scattered, ranging from 150 to 160. Masahiko Loo of State Street Investment Management noted that Bank of Japan normalization and higher domestic yields should gradually narrow the rate gap and draw capital back to Japan. However, he warned that elevated U.S. yields should prevent a straight-line yen rally.

Market expectations for government debt yields point to higher rates by year-end. Nine respondents see the 10-year Japanese government bond yield at 3% to 3.1%, up from 2.809%. Seven expect the 30-year yield to reach 4% to 4.1%, compared with 3.829% as of Tuesday. Takuji Aida, chief Japan economist at Credit Agricole, expects the next rate hike to occur in January, coinciding with the release of the bank's quarterly outlook report on economic activity and prices.