Analysis
BoJ Says Inflation Is at Target, Holds at 1.25%
The Bank of Japan held its policy rate at 1.25% on Friday in an 8-1 vote and said underlying inflation is now broadly in line with its 2% target. It also more than doubled the planned pace of its ETF sales.
For a central bank that spent most of the past 25 years trying to create inflation, Friday's statement contained a notable sentence. The Bank of Japan's quarterly Outlook Report said "underlying inflation is now at a level generally consistent with the 2% target", and that risks to prices are skewed to the upside, from higher import costs and companies setting prices more aggressively. It still left the short-term policy rate at 1.25% on October 30, as expected.
The vote was 8 to 1. Board member Hajime Takata proposed raising the rate to 1.5%, arguing that underlying inflation had already reached the target and that policy should move faster toward a neutral level. No member voted for a cut. The board repeated that it will keep raising rates and reducing accommodation if its projections are realised, with the pace depending on data, energy prices, the yen and AI-related demand.
The new projections explain the confidence. The median forecast for core consumer prices, excluding fresh food, was raised to 2.6% for fiscal 2027 from 2.4%, while fiscal 2026 stayed at 2.5% and fiscal 2028 at 2.0%. The measure that also excludes energy was lifted to 2.7% from 2.6% for fiscal 2027. Growth forecasts barely moved: 0.7% for fiscal 2026, up from 0.6%, and 0.7% for fiscal 2027, down from 0.8%. The bank attributed the inflation upgrade to higher crude oil prices, more expensive semiconductors and other goods, and a weaker yen, and the projections leave out the effect of the planned consumption tax cut on food and drinks.
The second decision, taken unanimously, concerned the bank's equity holdings. From January 2027 it will sell about ¥860 billion a year of exchange-traded funds at book value, up from about ¥330 billion, roughly ¥2.46 trillion at its own estimate of market value. The sales will rise to about 0.10% of stock market trading value from 0.05%, and the time needed to dispose of the whole portfolio falls to about 43 years from 112. The bank kept the option to slow or suspend sales if markets become disorderly.
Markets had priced around an 80% chance of a December hike before the meeting, and nothing in the statement argued against it. The yen firmed to about 157 per dollar, while the Nikkei 225 fell 2.1% to 63,290, dragged by the global sell-off in technology shares rather than by the bank. The ETF decision matters less for its size, which is tiny next to daily turnover, than for what it signals: the Bank of Japan is now unwinding the tools of the deflation era on a timetable, and it has told markets that the inflation it spent decades waiting for is here.