A target reached, with caveats
The Bank of Japan announced Friday that underlying inflation has broadly attained its 2 percent objective, almost 14 years after the goal was established as part of a campaign against prolonged deflation. Following a two-day policy meeting, the central bank kept its benchmark interest rate at approximately 1.25 percent, as most observers had anticipated, after raising it in September.[S1][S2][S3][S4][S5][S6][S7][S8]
Speaking at a post-meeting press conference, Governor Kazuo Ueda emphasized the importance of holding inflation near 2 percent. He cautioned that price growth could exceed the target and indicated that additional rate increases are possible. Ueda said the central bank's monetary policy would increasingly concentrate on keeping underlying inflation firmly anchored around 2 percent, and that the BOJ would calibrate the level of monetary accommodation at an appropriate moment while watching economic and price trends closely.[S1]
Ueda also reported that all nine members of the Policy Board concurred that underlying inflation was broadly in line with the 2 percent price stability target, though it had not yet been attained in a durable and stable manner. The rate decision itself was not unanimous: Hajime Takata dissented and argued for an increase to roughly 1.5 percent.[S1]
Dissent and the road to normalization
Takata contended that the BOJ has entered a new phase that calls for a quicker shift toward the neutral interest rate, which would permit more flexible policy adjustments. The central bank identified Middle East developments, demand tied to artificial intelligence and foreign exchange movements as principal risks to its economic and price outlook.[S1]
The BOJ first embraced its 2 percent inflation target in January 2013 through a joint statement with the government of then Prime Minister Shinzo Abe, initially intending to reach it in about two years. Then Governor Haruhiko Kuroda introduced an aggressive easing program, but the goal stayed out of reach and the timeline was postponed repeatedly. Recent price gains have been driven largely by external forces, including higher energy costs, and durable wage growth will be essential to a virtuous cycle of rising wages and prices.[S1]
The government has not formally declared deflation over, and Ueda declined to say whether the joint statement with the government might be revisited. The BOJ also chose to speed up sales of its exchange-traded fund holdings, lifting the annual pace to 860 billion yen on a book-value basis from about 330 billion yen, starting in January 2027.[S1]
Forecasts and what comes next
The BOJ's revised outlook nudged its fiscal 2026 growth projection up slightly, to 0.7 percent from 0.6 percent, while trimming the fiscal 2027 figure to 0.7 percent from 0.8 percent. For core consumer prices, the bank kept its fiscal 2026 forecast at 2.5 percent and lifted the fiscal 2027 estimate to 2.6 percent, up from 2.4 percent.[S1]
Both the U.S. Federal Reserve and the European Central Bank had already chosen to leave their policy rates untouched earlier in the week. The BOJ, for its part, lifted its policy rate to roughly 1.25 percent at its September meeting — a 31-year high — and kept it there in October. Many in the markets now expect a further hike when the board meets on Dec. 17-18.[S1]
