In its Outlook for Economic Activity and Prices (Outlook Report) published on 30 October, the Bank of Japan judged that underlying inflation was broadly consistent with 2%. It shifted the focus from policies aimed at raising prices to maintaining stability, while leaving interest rates unchanged.
In its Outlook for Economic Activity and Prices (Outlook Report) published on 30 October, the Bank of Japan judged that the underlying inflation rate was broadly consistent with its 2% target. This marked recognition that the level it had pursued for many years had been reached, and a milestone in shifting the focus from policies aimed at raising prices to policies aimed at maintaining them stably. The policy rate was left unchanged at around 1.25%.
Going forward, emphasis will be placed not only on the headline inflation rate but also on determining whether the trend of price increases has taken root across the broader economy, making the entrenchment of the achieved level a focus of policy management. The judgment that the target had been reached was separate from the government's declaration that deflation had been overcome, and the government has taken a cautious stance.
The backdrop to the 2% inflation target set in 2013 and the effort to overcome deflation was large-scale monetary easing under former Governor Kuroda. It took approximately 14 years to reach the target, while the Bank of Japan must now also address upside risks stemming from factors such as surging crude oil prices. At its September meeting, the Bank decided to leave the policy rate at 1.25%, and it maintained that level again this time.
Markets sometimes discuss the prospect of future rate hikes, but reaching the target does not signify a change in policy. The Bank is expected to manage policy so as to stabilize prices while containing upside risks. The focus of future policy decisions will shift to balancing the need to sustain the achieved level with vigilance toward further upside risks.