BoJ keeps rates on hold, says underlying inflation at 2% goal, lifts FY2027 CPI forecast

The outcome of the meeting gave hawks nearly all they sought: a declaration that 2% inflation is here, price risks to the upside, an upgraded inflation projection and one vote favouring a hike, with no dovish dissenter. That is likely to keep the yen supported near 157.8 per dollar, lift short-term JGB yields and reinforce market pricing of a December hike at around 80%. Oil remains pivotal to the projections. The central bank's assumptions see Dubai crude sliding from roughly $105 to $70, meaning any sustained climb tied to the Iran conflict would heighten inflation's upside risk. Faster ETF disposals provide a modest extra supply of Japanese shares from 2027, but a 43-year timeframe leaves the annual effect small.

The Bank of Japan has stopped just short of declaring deflation beaten, and its projections now point to inflation as the greater threat.

Key points:

• An 8-1 vote was recorded, with Takata proposing a hike to 1.5%.
• Underlying inflation is broadly consistent with the 2% target, according to the Outlook Report, and is seen staying there.
• Price risks lean to the upside, while activity risks are broadly balanced.
• The FY2027 core CPI forecast was lifted to 2.6% from 2.4%; FY2026 was kept at 2.5% and FY2028 at 2.0%.
• Real GDP is projected at 0.7% in FY2026 and FY2027, and 0.8% in FY2028.
• ETF sales are set to rise to about 860 billion yen a year from January 2027, shortening the disposal period to about 43 years from about 112.

Underlying inflation is now broadly aligned with the 2% price stability goal, the Bank of Japan said, issuing a long-awaited declaration that bolsters the argument for additional tightening. On Friday the central bank held its policy rate at 1.25%.

Within its quarterly Outlook Report, the central bank judged underlying CPI to be largely in line with the target and expected to remain close to it. It cited a lasting labour shortage, a wage-price feedback loop and medium- and long-term inflation expectations of roughly 2%. Price risks were characterised as tilted upward. If firms keep raising wages and prices, the bank cautioned, inflation expectations could climb and drive underlying inflation beyond the target.

Core inflation, excluding fresh food, is now seen by the board's median projection at 2.6% for fiscal 2027, up from 2.4%, a change the bank tied to higher crude prices since the summer. The fiscal 2026 forecast held at 2.5% and fiscal 2028 at 2.0%. In the first half of the projection window, the bank expects core inflation to climb clearly above 2%, helped by oil, higher semiconductor prices and other items, and a softer yen. After that, inflation is projected to ease back toward roughly 2% once the oil-price effect fades. The forecasts are based on Dubai crude moving from about $105 a barrel to about $70 by the end of the period, and they exclude a proposed cut to the consumption tax on food.

There was little movement in the growth projections, with real GDP expected to rise 0.7% in fiscal 2026 and fiscal 2027 and 0.8% in fiscal 2028. This fiscal year, the central bank sees the expansion continuing at a more modest pace as energy costs tied to the Middle East restrain activity, with government steps and AI-driven demand lending support.

The policy board's decision to stand pat was 8-1, with Hajime Takata dissenting. He proposed raising the rate to 1.5%, arguing that with underlying inflation already at target, the central bank ought to quicken its approach to a neutral rate. None of the board members backed a cut, clearing a risk that had been flagged before the meeting.

Unanimously, the board also decided to more than double the speed of its ETF selling from January 2027, reaching about 860 billion yen a year on a book-value basis versus roughly 330 billion yen. The disposal period would shrink to about 43 years from approximately 112.

At 0630 GMT on Friday, Governor Kazuo Ueda will hold a press conference, and investors will look for hints that the 2% declaration paves the way for a December hike.