Japan’s central bank says underlying inflation is now consistent with its long-sought 2% target, shifting attention toward keeping prices stable without undermining a fragile recovery.
The Bank of Japan kept its benchmark interest rate at 1.25% on Friday, October 30, while declaring that underlying inflation had reached a level consistent with its 2% target for the first time since the goal was adopted in 2013. The assessment marks a turning point in Japan’s long struggle with weak prices—and strengthens the case for further interest-rate increases.
The nine-member Policy Board voted 8–1 to maintain the overnight call-rate target, leaving borrowing costs at their highest level since 1995. Board member Hajime Takata dissented, proposing an immediate increase to 1.5% on the grounds that monetary policy should move more quickly toward a neutral setting as inflation reaches the bank’s goal.
Governor Kazuo Ueda said the central bank’s task was increasingly to keep inflation anchored around its target, rather than simply bring it up to that level. But he stopped short of committing to a timetable for further tightening, saying officials needed to assess how previous rate increases were affecting financial conditions.
It’s important to anchor underlying inflation around our target. That doesn’t mean we will just sit and wait.
Ueda told a news briefing.
We will adjust monetary policy as appropriate so that underlying inflation becomes anchored around 2%.
A milestone beyond a single inflation reading
The significance of Friday’s announcement lies in the BOJ’s assessment of the underlying price trend—not in consumer inflation crossing 2% for the first time. Japan’s core inflation had already exceeded that threshold at various points in the early 2020s, but the central bank had remained cautious about whether those increases would endure.
In its latest outlook, the BOJ said underlying consumer-price inflation was “generally consistent” with its price-stability target and was expected to remain around that level. Previously, it had described underlying inflation as “approaching 2 percent.”
That distinction matters because the bank looks beyond temporary price shocks when judging whether inflation is sustainable. Higher import and energy costs can lift consumer prices without necessarily producing the domestic spending and wage growth needed to sustain them. The BOJ now sees stronger evidence that price and wage increases are becoming embedded in the economy, with long-term inflation expectations moving around 2%.
The shift comes more than 13 years after the bank adopted its target and launched massive monetary stimulus under then-governor Haruhiko Kuroda. The BOJ began unwinding its extraordinary easing policies in 2024, but continued raising rates cautiously while assessing whether underlying inflation could hold near its goal.
Higher inflation forecasts, modest economic growth
The BOJ raised its forecast for core consumer inflation—which excludes fresh food—to 2.6% for fiscal 2027, running from April 2027 through March 2028. That compares with its previous projection of 2.4%. Its forecast for “core-core” inflation, excluding both fresh food and energy, increased to 2.7% from 2.6%.
Officials identified several sources of upward price pressure, including higher oil costs, yen depreciation and rising semiconductor prices linked to global demand for artificial intelligence. The bank also warned that companies had become more willing to raise wages and prices, increasing the risk that underlying inflation could overshoot its target.
Recent data illustrate the competing forces confronting policymakers. Core inflation rose to 2.1% in September from 1.7% in August, while inflation-adjusted wages increased 1.5% year on year in August—the eighth consecutive monthly rise, according to government data cited by CNBC. Government energy subsidies, meanwhile, have been restraining measured inflation.
The growth outlook remains subdued. The BOJ raised its fiscal 2026 economic-growth forecast to 0.7% from 0.6%, but lowered its fiscal 2027 forecast to 0.7% from 0.8%.
| Indicator | Latest decision or forecast | Previous forecast |
|---|---|---|
| Benchmark interest rate | 1.25%, unchanged | — |
| Fiscal 2027 core inflation | 2.6% | 2.4% |
| Fiscal 2027 core-core inflation | 2.7% | 2.6% |
| Fiscal 2026 economic growth | 0.7% | 0.6% |
| Fiscal 2027 economic growth | 0.7% | 0.8% |
The inflation and growth projections describe different measures and time periods; the 2.6% core-inflation forecast is not the BOJ’s estimate of underlying inflation itself.
Proposed tax cut complicates the outlook
An important qualification concerns the government’s proposed temporary consumption-tax cut. The BOJ’s fiscal 2027 inflation forecast does not incorporate the measure, whose legislation remains under deliberation in Japan’s parliament, according to NHK. The central bank estimates the cut could lower consumer prices by around 1.3 percentage points.
The proposal adds another moving part to an outlook already affected by subsidies, exchange rates and imported energy costs. It also highlights the distinction between the BOJ’s inflation assessment and the government’s broader judgment about whether Japan has decisively escaped deflation.
Prime Minister Sanae Takaichi’s administration has remained more cautious about declaring that battle over. Economy Minister Minoru Kiuchi said the previous week that the country was “not there,” even as the central bank moved toward a more confident assessment of the price trend.
BOJ accelerates the sale of its equity holdings
Alongside the rate decision, the BOJ unanimously approved a faster disposal of its exchange-traded fund holdings, taking another step away from its exceptional stimulus policies.
From January 2027, annual ETF sales will rise to about ¥860billion on a book-value basis, up from ¥330billion. The BOJ said sales that began in January 2026 had proceeded smoothly without a major market impact, while stock-market trading volumes had expanded.
The accounting distinction is important: ¥860 billion represents the holdings’ book value, not their expected sale proceeds. Using the market-to-book ratio of ETFs sold between January and September 2026, the bank estimated the revised annual pace would correspond to approximately ¥2.46trillion at market value.
The bank retained the ability to adjust or suspend sales temporarily in response to financial-market conditions. Its separate disposal of Japanese real-estate investment trusts will remain at about ¥5 billion annually on a book-value basis.
Faster ETF sales could increase the BOJ’s payments to the government and potentially help finance Takaichi’s policy agenda, Bloomberg reported. That remains a possible fiscal benefit, rather than confirmation that the proceeds have been earmarked to fund a particular tax cut.
December comes into focus—but no hike is guaranteed
The decision amounted to a hawkish pause: the BOJ left rates unchanged while strengthening the argument for further increases. Ueda said financial conditions remained accommodative and warned that policymakers needed to stay alert to inflation exceeding the target.
The pause followed a September rate increase and gave officials more time to examine the cumulative effects of earlier tightening on lending and the wider economy. Higher prices could still weaken household consumption, while the effects of previous rate increases may not yet be fully visible.
Most economists surveyed by Reuters expect the next increase to take the policy rate to 1.5% in December, with forecasts for the eventual peak generally centred on 1.75% to 2%. A separate CNBC survey found that 13 of 16 respondents expected rates to reach that range around mid-2027. Those are outside forecasts, not BOJ commitments.
The next policy meeting is scheduled for December 17 to 18. Ueda made clear that the timing of further action would depend on incoming evidence, rather than a fixed interval between increases.
We can’t decide in advance how many months we will spend each time before raising rates.
BOJ Governor Kazuo Ueda
We need to cautiously look at financial conditions as what we see now may not necessarily fully reflect the cumulative impact of past rate moves.
