The Bank of Japan has confirmed for the first time that its long-standing 2% inflation target has been reached, marking a turning point as the focus of monetary policy shifts to curbing inflation. Policy changes, including at the December meeting, are now in view.
The Bank of Japan has confirmed for the first time that its long-standing target of 2% underlying inflation has been reached. The focus of policy is expected to shift significantly from pushing prices higher to restraining them, and Governor Ueda Kazuo (植田 和男) positioned this as a milestone. The Bank’s emphasis on achieving a stable 2% level going forward has become clear.
With a policy change at the next meeting in December in view, the Bank of Japan is discussing the pace at which to bring rates closer to the neutral rate. The neutral rate is estimated at 1.1%–2.5%, while the current policy rate is 1.25%. Rate hikes are expected every 3–4 months, and some believe that financial conditions will remain accommodative for the time being.
For households, food prices are expected to continue rising in November, with items such as mayonnaise and canned coffee increasing in price. Some cases have been identified in which the increases exceed the effects of a consumption tax cut, raising concerns about a decline in households’ real purchasing power. The Bank of Japan’s policy shift is increasingly viewed as signaling a transition to an era in which high prices have become the norm.
While the market expects upward pressure on government bond yields and a correction in the yen’s depreciation, higher mortgage rates and corporate borrowing costs are viewed as downside risks. The Bank of Japan faces the difficult task of watching for both excessive tightening and delayed tightening, while balancing inflation control with economic stability.