The Bank of Japan (BOJ) announced that Japan’s underlying inflation has finally reached its long-standing target of 2% for the first time since 2013. Despite this milestone, the central bank decided to keep its policy interest rate steady at 1.25%, maintaining it at its highest level since 1995. The monetary policy decision saw an 8-1 board vote, with Hajime Takata dissenting in favor of a rate increase to 1.5%. Alongside the rate hold, the BOJ raised its inflation forecast for fiscal year 2027 to 2.6%, up from 2.4%, and lifted the "core-core" inflation forecast, which excludes fresh food and energy prices, to 2.7% from 2.6%.

The BOJ indicated that inflation dynamics have shifted, noting a stronger tendency among firms to raise wages and prices, which could cause inflation to increase beyond the 2% threshold. This development supports a growing optimism within the bank about achieving sustained inflation through what it describes as a “self-sustaining wage-price-consumption cycle.” However, economists remain cautious about the timing of further rate hikes. Krishna Bhimavarapu, APAC economist at State Street Investment Management, described the BOJ’s stance as a “hawkish hold," emphasizing the anticipation of additional rate increases while warning that Japan’s economic growth still lacks the momentum to justify an immediate tightening move.

Market expectations align with the bank’s cautious but firm outlook, as a CNBC survey of 16 economists revealed unanimity in anticipating a rate hike either in December or early next year. Among them, most predict that BOJ’s terminal rate—the peak in the tightening cycle—will fall between 1.75% and 2% by mid-2027. This consensus emerges amid ongoing challenges in Japan’s economy, including a weak Japanese yen and elevated energy prices, which have contributed to rising inflation. However, price increases have been partially offset by government energy subsidies under Prime Minister Takaichi’s administration.

Recent economic indicators reinforce the BOJ’s reassessment of inflation. Japan’s core inflation reached 2.1% in September, surpassing forecasts and marking 2026’s highest level, while inflation-adjusted wages have increased for eight consecutive months with a 1.5% rise in August compared to the previous year. Finance Minister Satsuki Katayama recently commented that Japan is entering a phase of sustained wage-driven inflation, suggesting that underlying price pressures are becoming more entrenched. As the BOJ continues to monitor these trends, further adjustments to monetary policy are expected to balance inflation control with moderate economic growth.