Bank of Japan Nears 2% Inflation Verdict as Rates Expected to Stay at 1.25%

October Meeting Could Mark a Change in Japan's Inflation Fight

The Bank of Japan is expected to keep its policy interest rate at 1.25% on October 29 and 30, 2026, while deciding whether the underlying rise in consumer prices has reached its 2% target. The assessment would come nearly 14 years after the bank adopted that goal in January 2013, following a long struggle with falling or weak prices.

The decision involves more than checking whether a monthly inflation figure has crossed 2%. Governor Kazuo Ueda and the Policy Board are examining whether wages and prices can keep rising steadily after temporary influences, including energy shocks and government subsidies, fade.

The bank raised its rate from 1% to 1.25% in September, taking it to the highest level in 31 years. Holding steady in October would give policymakers more time to assess that increase while leaving room for another move as early as December.

The BOJ's September meeting summary shows why the judgment remains difficult. At the September 17 and 18 meeting, one opinion said underlying inflation had generally reached 2%, while another said the indicators made a conclusive determination difficult. Those views preceded the October meeting, where the bank is expected to publish its latest assessment.

What Reaching 2% Would Mean

Japan's core consumer prices, which exclude fresh food, have recorded annual increases above 2% for four consecutive years since 2022. The BOJ nevertheless wants evidence of a lasting price trend supported by wages, rather than increases driven mainly by imported oil or other temporary costs.

Core inflation is a published price index. Underlying inflation is the broader trend policymakers try to identify by examining several indicators, pay developments and business behavior. Even an index excluding fresh food can move sharply when energy prices or public support measures change.

The September summary said recent national inflation readings both excluding fresh food and excluding fresh food and energy had been in a range of 1.5% to 2%, partly because of government measures. Some indicators of underlying inflation were above 2%, while others were below it.

The policy change would be a shift in purpose: from encouraging inflation to rise toward 2% to keeping it close to that level. For households, the bank's goal is a steadier pace of price increases, supported by earnings, rather than repeated shocks to essential bills.

Ueda Focuses on Keeping Inflation Steady

Ueda told parliament ahead of the October meeting that underlying inflation was "quite close" to the target. He pointed to a tight labor market and a moderate economic recovery, alongside rising raw material costs associated with the Middle East conflict.

The BOJ governor described the bank's changing task:

It is becoming more important to anchor underlying inflation around our 2% target,

Anchoring inflation means keeping the expected pace of price increases stable. Businesses setting prices and workers negotiating pay then have a more predictable basis for their decisions.

Ueda also warned that delaying appropriate interest rate adjustments could make investors more worried about excessive inflation, pushing up interest rates on longer government bonds. Those rates affect government financing costs and can influence borrowing costs elsewhere in the economy.

July Forecasts Provide the Starting Point

The BOJ's July economic outlook projected that underlying inflation would become generally consistent with the target between the second half of fiscal 2026 and fiscal 2027. Japan's fiscal 2026 runs from April 2026 through March 2027, so that window begins in October 2026.

The Policy Board's median forecasts for consumer inflation excluding fresh food were:

• Fiscal 2026: 2.5%.
• Fiscal 2027: 2.4%.
• Fiscal 2028: 2.0%.

Those figures describe a gradual slowdown, with projected inflation falling by 0.5 percentage points between fiscal 2026 and fiscal 2028. The July outlook expected inflation excluding fresh food to rise above 2% from the second half of fiscal 2026, then move back toward 2% as the effects of expensive crude oil weakened.

The October outlook may slightly raise the fiscal 2027 inflation forecast because of renewed oil price pressures, according to four people familiar with the bank's thinking. The size of any revision and the final judgment on whether underlying inflation has reached the target have not been announced.

The new report will also contain forecasts for real gross domestic product growth through fiscal 2028. Real GDP measures changes in economic output after adjusting for price movements. Existing projections put growth at 0.6% in fiscal 2026 and 0.8% in fiscal 2027, and are expected to remain broadly unchanged.

Tokyo Shows How Subsidies Can Move Prices

Tokyo's September inflation figures illustrate the challenge of separating lasting pressure from changes in household bills caused by public policy. Core inflation in the capital's 23 wards rose to 2.7%, from 1.8% in August, an increase of 0.9 percentage points.

The reading exceeded the median forecast of 2.4%. Bento lunch prices rose 28.1% from a year earlier, while water utility prices increased 65.6%.

Water bills were affected by the end of Tokyo's temporary suspension of its basic water fee over the summer. Depending on billing cycles, the fee returned in August or September. That change raised measured inflation as households resumed paying a charge that had temporarily disappeared.

Tokyo's index is watched for clues about nationwide prices. National CPI figures are due in late October, providing another piece of evidence before or around the policy meeting. The BOJ must assess such price movements alongside wages, services prices and household spending.

Oil, the Yen and AI Pull on the Outlook

Middle East tensions are affecting Japan through both prices and economic activity. The September meeting summary said petroleum reserves and progress in finding alternative supplies had helped contain the economic damage initially feared. Higher import costs nevertheless remained a risk to prices.

A weaker yen adds pressure because Japanese buyers need more yen to purchase goods priced in foreign currencies. Renewed currency weakness that lifts import costs is one reason policymakers could reconsider the expectation of an October pause.

Artificial intelligence demand works through a different channel. Strong overseas demand for related goods supports Japanese exports and investment, helping offset weak household consumption while also adding pressure on prices.

Ueda explained the connection between global AI spending and Japan's economy:

Very strong global AI demand is also boosting capital expenditure and exports, thereby pushing up prices for a wide range of goods,

The September discussion also identified rising packaging and distribution costs as reasons companies might increase selling prices. Policymakers are watching how far these costs spread and whether businesses continue to raise wages as well.

Why Some Policymakers Favor Waiting

The September meeting exposed different judgments about the strength of the economy. Some opinions favored raising rates because activity and prices were developing broadly as expected and financial conditions still supported borrowing and spending.

Other opinions favored leaving rates unchanged because recent inflation was below 2% and economic growth appeared uneven. The summary noted subdued private consumption and a recent pause in the acceleration of services inflation.

Policymakers also interpreted April to June GDP differently. One opinion attributed weak domestic demand figures partly to technical treatment of patent rights sold abroad and free school lunches. Another stressed that domestic demand had contracted and that the positive contribution from trade reflected falling imports amid supply constraints.

For the October decision, that debate makes the balance between inflation and growth central. Raising rates can restrain borrowing and demand, helping contain prices. It also adds costs for borrowers when household spending is already soft.

The September summary said most firms viewed the effects of past and possible near term rate increases as limited, with very few saying interest burdens would cause them to hold back fixed investment. Government representatives nevertheless urged the bank to examine the cumulative effects of earlier increases and explain its decisions carefully.

December Is the Next Focus for Markets

Market pricing described alongside the Tokyo inflation release put the probability of an October rate increase at 17%, compared with an 82% expectation of a December increase, according to Totan ICAP data. Those figures capture expectations at that point and can change as economic data arrive.

Many market participants expect a possible December move to 1.5%. A survey of analysts pointed to two further increases taking the rate to 1.75% by June 2027, with expectations for the eventual peak concentrated between 1.75% and 2%.

The BOJ has made further tightening conditional on economic activity, prices and financial conditions. Its July outlook said it would continue raising the policy rate while considering the timing and pace. September opinions ranged from calls for faster action if prices accelerated to arguments that inflation was approaching the target slowly enough to avoid haste.

The coming sequence gives investors and households several points to watch:

• September 17 and 18, 2026: Policymakers debated whether underlying inflation had reached 2%, and the bank raised its rate to 1.25%.
• October 1: The tankan business survey showed corporate inflation expectations remained elevated without accelerating from three months earlier.
• Late October: Nationwide consumer price data are scheduled for release.
• October 29 and 30: The BOJ meets and is expected to publish updated growth and inflation forecasts after the meeting.
• December: Another rate increase is possible, depending on prices, economic activity and financial conditions.

What Households and Businesses Will Watch

Japanese households face the immediate combination of higher prices for some everyday purchases and the possibility of further borrowing cost increases. The September Tokyo figures show how food prices and the return of utility charges can change budgets even when policymakers judge the broader inflation trend to be relatively stable.

Workers and employers will also be watching the next round of wage decisions. The BOJ's outlook depends on pay and prices continuing to rise together. Government fuel subsidies have moderated measured inflation, which can influence the cost of living figures used in wage negotiations.

The government plans a cut to consumption tax on food for two years starting in April 2027. The BOJ is expected to leave its effect out of the October projections because the legislation has yet to pass parliament. That leaves the forecast dependent on existing policy rather than an unfinished tax measure.

Businesses will be looking for an explanation of how the bank judges financial conditions after September's increase. A decision to hold at 1.25% could accompany a firmer assessment that inflation has reached the target, with later rate decisions focused on keeping it there.

Key Points

• The BOJ is expected to hold its policy rate at 1.25% at the October 29 and 30 meeting.
• The bank will assess whether underlying inflation has reached its 2% target, nearly 14 years after the goal was adopted.
• September opinions differed on whether the target had already been reached and on the urgency of further rate increases.
• July forecasts put inflation excluding fresh food at 2.5% in fiscal 2026, 2.4% in fiscal 2027 and 2% in fiscal 2028.
• Tokyo core inflation rose to 2.7% in September, partly reflecting the end of temporary water fee relief.
• Oil prices, the yen, wages and AI demand will shape the updated outlook, with another rate increase possible in December.