The Bank of Japan announced on October 30th that underlying inflation has effectively reached its 2% target for the first time since the goal was introduced in 2013, marking a major milestone in the country’s efforts to achieve sustained price growth, while keeping its benchmark interest rate unchanged at 1.25% as policymakers assess the impact of last month’s rate increase.
The central bank said in its latest Outlook Report, which provides updated forecasts for economic activity and prices, that the underlying rate of inflation, which excludes temporary factors affecting consumer prices, had reached a level “broadly consistent with the 2% price stability target.”
The assessment represents the first time since the BOJ adopted its 2% inflation target in 2013 that the central bank has formally recognized underlying price growth as effectively reaching that level. Unlike headline inflation, which can fluctuate because of temporary increases in food and energy prices, underlying inflation is intended to reflect more persistent price trends across the economy.
At its monetary policy meeting, the BOJ decided by a majority vote to maintain its short-term policy interest rate at 1.25%, following an increase at its previous meeting in September, when it raised borrowing costs for the first time in three months.
The decision to leave rates unchanged was intended to give policymakers more time to evaluate the economic and financial effects of the latest increase before considering additional monetary tightening.
However, board member Hajime Takata proposed raising the policy rate to 1.5%, arguing that underlying inflation had already reached the central bank’s price stability target and that monetary policy had entered “a new phase” requiring a faster pace of interest rate increases.
Takata’s proposal was rejected by a majority of the policy board, highlighting differences among members over how quickly the central bank should proceed with further tightening.
The BOJ also decided to accelerate the sale of exchange-traded funds, or ETFs, accumulated during years of monetary easing, significantly increasing the pace at which it will reduce its holdings.
Under the new plan, annual ETF sales will rise from approximately 330 billion yen to 860 billion yen in book value terms, more than doubling the previous pace.
The faster disposal schedule is expected to reduce the time required to sell the central bank’s ETF holdings from approximately 112 years to 43 years, representing a substantial acceleration in the gradual unwinding of assets purchased under earlier monetary stimulus programs.
The ETF sales are part of the BOJ’s broader effort to normalize monetary policy after more than a decade of extraordinary measures designed to combat deflation and encourage economic growth.
With underlying inflation now considered broadly consistent with its long-standing target, the central bank is expected to continue raising interest rates to prevent excessive price increases and maintain inflation at a sustainable level of around 2%.
Attention is now turning to BOJ Governor Kazuo Ueda’s afternoon news conference on October 30th, where investors and economists will closely examine his comments for indications of how quickly further interest rate increases may follow.
Ueda’s assessment of inflation risks and the effects of previous tightening will be particularly important as the central bank moves from trying to achieve its inflation target toward ensuring that price growth remains stable without placing excessive pressure on economic activity.
Source: TBS
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