After their decision to leave interest rates unchanged at 1.25% last week, the BOJ is once again reinforcing the message that underlying inflation has reached levels consistent with its 2% target. There is a sense that it’s almost as if they’re trying to convince themselves that it might be finally time to do something about it.
Here are some remarks from their latest quarterly outlook report:
- Rate hikes will likely help ease inflationary pressures, in turn supporting household consumption
- Underlying inflation has accelerated to around 2%, gradually becoming embedded around that level in recent years
- Real interest rates have been rising recently, particularly in the long and super-long-term segments
- BOJ is closely scrutinising asset price movements, including stocks and foreign exchange rates, when assessing financial conditions
- Will examine a broad range of economic data and surveys rather than relying on any single indicator to assess Japan’s financial environment
And the inflation forecasts from the report certainly add weight to the argument that price pressures are mounting, similar to what they spoke of last week.
For the upcoming fiscal year 2027, core inflation is now projected at 2.6% – up from 2.4% in July. Meanwhile, “core-core” inflation (excluding both fresh food and energy) is seen at 2.7% compared with 2.6% previously. Those levels aren’t quite what we would associate with an economy struggling to generate inflation.
So, what’s the hold-up?
Well, the BOJ still wants to assess how previous rate hikes are filtering through financial conditions for the most part. And with longer-term real interest rates already rising, there is perhaps some justification for not rushing things.
Having said that, the central bank can’t exactly afford to wait for too long either. There is a potential political risk to consider too as mentioned here.
For all the talk about inflation becoming entrenched, the BOJ will sooner or later have to deal with the fact that it is actions that speak louder than words. And that is especially the case if policymakers want to retain confidence in markets about their policy direction and conviction.
This article was written by Justin Low at investinglive.com.