BOJ governor Kazuo Ueda signals October rate pause as December hike looms

The Bank of Japan is preparing to signal that underlying inflation has effectively reached its 2% target, bolstering expectations of another interest rate hike in December while policymakers pause this month.

Governor Kazuo Ueda has done little to challenge growing market bets that the central bank will hold interest rates steady at its meeting on 29-30 October. Instead, the central bank appears comfortable letting investors focus on December for its next potential move.

The BOJ raised its benchmark interest rate in September to what sources described as a 31-year high. Having also lifted rates earlier in the summer, policymakers have entered a phase focused on keeping underlying inflation from overshooting. However, after the September move, many on the board are cautious about raising rates again so quickly. They prefer to use the October meeting to assess how those previous hikes have affected domestic financial conditions.

Sideways inflation eases immediate pressure

While the central bank is not rushing to act this month, economic data is moving in its preferred direction. Recent figures, including Tokyo consumer inflation and the BOJ’s quarterly Tankan business survey, have increased confidence inside the bank that demand-driven inflation is settling around the 2% target.

The Tankan survey showed that corporate price pressures are moving sideways rather than accelerating sharply. For policymakers, this is a reassuring sign. It suggests inflation expectations are well-anchored and risks are balanced, reducing the immediate urgency for a back-to-back interest rate increase.

Additionally, external pressures have softened. A calmer outlook for US interest rates has taken some of the heat off the Japanese yen, easing the pressure on the BOJ to defend the currency with rapid rate hikes.

The road to December

Instead of raising rates this month, the BOJ is expected to use its quarterly economic outlook report, due at the end of October, to send a clear signal.

The bank is likely to state that underlying inflation—the broad trend in prices after stripping out volatile, temporary factors—has roughly met its 2% objective. In its July report, the BOJ had projected reaching this milestone sometime between late 2026 and early 2028. Acknowledging that it has arrived early would be a powerful symbolic move, giving the central bank the justification it needs to continue normalising monetary policy.

Some policymakers already believe this milestone is secure. According to the summary of opinions from the September meeting, several board members noted that underlying inflation was already close to or at the target. Steady wage growth and rising wholesale and consumer prices have supported this view.

For markets, the message is becoming clearer. While October looks set to be a quiet meeting for interest rates, the groundwork is being laid for a December hike.