December expectations build after October hold
The BOJ's two-day meeting ended October 30, 2026, with an 8-1 vote to keep the short-term policy rate unchanged. Hajime Takata cast the dissenting vote, unsuccessfully seeking an increase to around 1.5%.
Ueda said policymakers had paused further increases to assess developments in the economy and prices. He said the board's next policy discussion would pay particular attention to the risk of higher-than-expected inflation. His remarks echoed the signals that preceded September's rate increase, after the bank delayed action in July.
Markets had already priced in roughly an 80% probability of a December hike before the October meeting. Most economists surveyed by Reuters expect the rate to reach 1.5% in December and rise further in 2027, with forecasts for its eventual peak clustering around 1.75% to 2%.
Nobuyasu Atago, a former BOJ official and now chief economist at the Rakuten Securities Economic Research Institute, described a December increase as "practically a certainty" given the bank's communications. The harder question, he said, is what follows: another increase would put the rate at 1.75%, potentially close to a neutral setting.
Inflation outlook turns firmer
Last week, the BOJ declared that its 14-year effort to achieve its inflation target had succeeded. It described a shift in policy toward guarding against inflation exceeding that target, reinforcing expectations of tighter monetary policy.
September's annual core inflation rate was 2.1%, above the BOJ's 2% goal. Price pressures outweighed the dampening effect of fuel subsidies. Meanwhile, the economy expanded at an annualized rate of 1.4% in the second quarter, and businesses continued to increase spending despite pressures from the Middle East conflict.
The quarterly outlook published October 30 also pointed to stronger inflation. The BOJ raised its core consumer inflation forecast for the fiscal year ending March 2028 from 2.4% to 2.6%. It increased its projections for "core core" inflation, which excludes fuel costs, for the next two fiscal years as well.
The bank said long-term inflation expectations were "moving around 2%," expressing confidence that the public was increasingly coming to expect sustained wage and price gains.
Its assessment of inflation-adjusted interest rates changed, too. The October report described real rates as "rising recently, although those for short-term zones remain low." In July, it had characterized them as "negative mainly in short- to medium-term zones."
Finding the point where rates become restrictive
The uncertainty centers on Japan's neutral interest rate: the borrowing-cost level that neither encourages nor restrains economic activity. BOJ staff estimates place the nominal neutral rate in a broad range of 1.1% to 2.5%. It is one guide to how far policymakers can raise rates, but it cannot be observed directly, and different models produce different estimates. The BOJ therefore avoids endorsing a precise figure.
At a benchmark rate of 1.25%, officials face pressure to move relatively quickly toward neutral to keep inflation from accelerating. Yet households and businesses have spent decades with near-zero borrowing costs. The BOJ must also consider whether their sensitivity to higher rates could undermine Japan's still-fragile recovery.
Ueda said the bank had received reports of tightening lending conditions for small businesses and would watch for signs that such complaints were spreading. He nevertheless described financial conditions overall as accommodative.
Japan's history makes that assessment particularly difficult. Since becoming independent in 1998, the BOJ has largely dealt with weakening inflation or deflation, leaving it with limited experience of how an economy accustomed to exceptionally low rates responds to sustained tightening.
Former Governor Haruhiko Kuroda introduced massive monetary stimulus in 2013 to combat deflation and bring inflation toward 2%. The BOJ ended its combination of unconventional easing measures in 2024. Its rate increases have since become more closely spaced: September 2026's hike followed one in June, compared with roughly two increases a year in 2024 and 2025.
Board members differ on the path ahead
Policymakers have not agreed on how high rates should ultimately rise. Naoki Tamura, a hawkish board member, puts the likely neutral rate at around 2% and favors steady, gradual increases. Takata supports a faster tightening pace.
Junko Koeda, a former academic, has been more guarded, saying only that the neutral rate is likely well above 1%. Two members appointed by Prime Minister Sanae Takaichi are also expected to take a cautious approach; both opposed September's increase.
Mari Iwashita, director of interest rate strategy at Nomura Securities, said the BOJ probably still regards its benchmark as some distance below neutral. In her assessment, that makes an increase to 1.75% around March 2027 more likely. The bank could then pause, she said, with its subsequent course still undecided.
Faster ETF sales begin in January
Alongside its rate decision, the BOJ announced that it would more than double annual sales of exchange-traded funds beginning in January 2027. Sales will rise from about 330 billion yen to about 860 billion yen on a book-value basis, equivalent to roughly 2.5 trillion yen at market value.
The bank left its annual sales of Japanese real estate investment trusts unchanged at about 5 billion yen.
