Bank of Japan may lift inflation outlook while keeping rates steady

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BOJ may lift inflation outlook

Highlights

Bank of Japan is expected to keep rates steady in October, with any core inflation outlook revision for fiscal 2027 likely to be minor from the current 2.4%.
BOJ will maintain growth projections at 0.6% for 2026 and 0.8% for 2027, attributing export strength to AI-related goods despite weak consumption.
Despite underlying inflation near 2% and stable corporate expectations, analysts foresee potential BOJ rate hikes to 1.75% by June 2025, with a terminal rate of 1.75–2%.

October policy outlook and forecast revisions

As reported by Reuters, the Bank of Japan is likely to keep rates unchanged this month unless renewed yen weakness pushes up import costs and broader inflation, according to four sources familiar with the central bank's thinking.

The central bank is due to release fresh quarterly forecasts after the meeting, and the board may slightly revise up its core consumer inflation outlook for fiscal 2027 to reflect a renewed rise in crude oil prices. In July, the BOJ projected core consumer inflation at 2.5% for the current fiscal year ending in March 2027 and 2.4% for the following year, assuming the initial fuel-cost shock would ease from the latter half of next year.

Sources say any upward revision is likely to be minor, with little evidence that energy-driven inflation is feeding into a sustained wage-price spiral. The BOJ is also likely to leave its economic growth projections broadly unchanged at 0.6% for fiscal 2026 and 0.8% for 2027, supported by strong exports of AI-related goods even as consumption remains soft.

The board is unlikely to factor in the expected effect of a two-year cut in the consumption tax on food items from April next year because legislation for the measure has yet to pass parliament.

Scope for further tightening remains

After lifting its key rate to 1.25% last month, the highest level in 31 years, the BOJ is signalling a policy phase focused on preventing underlying inflation from overshooting its 2% target. Governor Kazuo Ueda has warned that broad price pressures could exceed that goal because of the Middle East conflict, yen weakness and brisk AI-related demand.

With underlying inflation roughly at 2%, the upcoming report is expected to stress the need to anchor price growth around the target, suggesting the BOJ remains prepared to continue raising rates gradually. The central bank is also expected to maintain its view that financial conditions stay accommodative, leaving room for additional tightening.

Recent data, however, suggests inflation risks are not intensifying enough to justify another immediate increase. Analysts say wages are likely to keep rising next year, but not sharply, while government fuel subsidies are moderating this year's consumer inflation benchmark that unions use in pay talks.

The BOJ's tankan survey published on October 1 shows corporate inflation expectations remain elevated but do not accelerate from three months earlier. In a Reuters poll, many analysts expect the BOJ to raise its policy rate twice to 1.75% by June next year, with estimates for the terminal rate centered between 1.75% and 2%.

In our earlier article on Bank Negara Malaysia’s policy outlook amid Middle East-driven energy price pressures, we explained how the central bank signaled it has more room to adjust rates while still expecting inflation to stay within its forecast range. We also noted how that shift in guidance influenced market rate-hike expectations and tracked the ringgit’s stability alongside increased bond-yield volatility as investors weighed global risks.

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