By Leika Kihara and Takahiko Wada
TOKYO, Oct 6 (Reuters) – The Bank of Japan may signal this month that underlying inflation has roughly hit its 2% target, three sources familiar with its thinking said, highlighting its readiness to raise interest rates again in the coming months.
Any such announcement would largely be symbolic, but it would reinforce dominant market expectations of a December hike and signal the BOJ’s readiness to keep raising interest rates in short intervals.
The central bank has begun stressing the need to anchor underlying inflation around its target in judging the pace and timing of further interest rate increases.
Having just raised rates in September, many in the central bank are cautious about delivering another hike this month and prefer to gauge more data on how past rate increases have affected domestic financial conditions, the sources said.
A recent slew of data, such as Tokyo consumer inflation and the central bank’s quarterly “tankan” business survey, are likely heightening the BOJ’s conviction that underlying inflation has roughly reached its 2% target, the sources said.
But the tankan also showed corporate inflation moving sideways and not heightening in a way that requires an immediate policy response, the sources said, taking pressure off the BOJ to deliver a back-to-back rate hike this month.
“Inflation expectations remain elevated but not flaring up,” suggesting that while inflation risks remain, they are not heightening sharply, one of the sources said, a view echoed by another source.
“All in all, prices are moving in line with the BOJ’s projections,” suggesting that underlying inflation was now roughly around its target, a third source said. The sources spoke on condition of anonymity as they were not authorised to speak publicly.
HITTING TARGET ‘IN NO TIME’
The BOJ raised its key rate to a 31-year high last month, with Governor Kazuo Ueda signalling the central bank has entered a phase focused on preventing underlying inflation from overshooting its target, raising the prospect of tighter policy.
The hike followed one in June, leading markets to project the BOJ raising rates at roughly once every quarter.
While a renewed slide in the yen could pile pressure on the BOJ to hike rates again in October, receding prospects of a US rate increase this month have taken some pressure off the BOJ to do so, analysts say.
Still, the BOJ remains focused on forestalling inflationary risks with another near-term rate hike. In raising rates in September, the governor said underlying inflation, which is the broad, demand-driven price trend that strips away one-off factors, was quite close to 2%.
A summary of opinions at the September meeting also showed some members saying underlying inflation was quite close to 2% or would reach that level “in no time.”
Along with continued rises in wholesale and consumer inflation, steady wage gains and a renewed rise in crude oil prices have heightened prospects for underlying inflation to durably move around the BOJ’s target, the sources said.
The BOJ will likely point to such factors in signalling that underlying inflation has roughly hit its target in a quarterly report due after its next policy meeting on October 29-30, they said.
In the current report released in July, the BOJ said it expects underlying inflation to reach levels consistent with its 2% target sometime between October and March 2028.
(Reporting by Leika Kihara and Takahiko Wada; Editing by Jacqueline Wong)
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