Bank of Japan Shifts Focus to Stabilizing Inflation at 2%

The Bank of Japan (BOJ) is transitioning from efforts to increase inflation to ensuring it remains stable at around 2%, according to Daiwa Securities. This shift was highlighted by BOJ Governor Kazuo Ueda during a press conference on October 16, where he stated that underlying inflation is now broadly close to the target level and that any further increase cannot be tolerated. The BOJ is expected to maintain its policy rate at 1.25% during its upcoming meeting on October 29-30, while potentially upgrading its inflation assessment.

Daiwa notes that the durability of wage growth will be crucial in determining the timing of future interest rate hikes. Japan's largest trade union federation, Rengo, is reportedly considering seeking pay increases of 5% or more in 2027, marking the fourth consecutive year of such demands. The central bank's ability to keep inflation anchored at 2% will depend on whether wage gains become a lasting norm across both large and small companies.

Rising import prices, driven by higher crude oil costs, pose additional inflation risks. Daiwa emphasizes that while consumer spending remains weak, business investment is resilient, as evidenced by a 5.2% increase in core machinery orders in August. The upcoming wage negotiations will be a critical test for the BOJ, as they will provide insights into the sustainability of inflation and wage growth in Japan.

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Source: KLEA News