BOJ Poised for October Hold, Hawkish Inflation Outlook Fuels December Rate Hike Expectations
| Pair | Now | Since publish |
|---|---|---|
| USDJPY | — | — |
- BOJ expected to hold rates at 1.25% this week.
- Hawkish inflation, 3.7% services PPI boost December hike odds.
- Underlying inflation gauge hits 3%, exceeding 2% target.
- BOJ may declare 2% target met; Fed hike risk noted.
The Bank of Japan (BOJ) is widely anticipated to maintain its policy rate at 1.25% at its upcoming meeting on October 29-30. However, policymakers are reportedly considering a slight upgrade to their inflation forecast for fiscal year 2027, driven by persistent price pressures, including rising oil costs. Underlying inflation in Japan has recently risen above the BOJ’s 2% target, with some gauges reaching 2.4%, reinforcing concerns about upside risks to prices. This evolving inflation outlook, coupled with Deputy Governor Himino’s warnings, has significantly increased market expectations for a subsequent rate hike, with swaps now pricing a high probability of a move to 1.50% in December. The yen has found support from these hawkish expectations, while short-dated Japanese government bond yields are also anticipated to rise.
Expectations for a Bank of Japan (BoJ) hold on Friday are reinforced, with Governor Ueda’s prior comments against back-to-back hikes cited. The BoJ is anticipated to declare an effective 2% inflation call, which could support the yen and advance December hike pricing. Ahead of the decision, Japan’s services Producer Price Index (PPI) is in focus, with a reading at or above 3.7% potentially strengthening December hike expectations. A key risk for the yen is if two “reflationist” BoJ members, who previously opposed a hike, switch to calling for a cut, signaling a dovish shift. Additionally, the USD/JPY pair is exposed to this week’s Federal Reserve meeting, as a surprise US rate hike could, according to a Nikkei report, prompt an “emergency” back-to-back BoJ move. USD/JPY saw a rise on Monday, recovering approximately half of its losses from October 22-23.
A CNBC survey of 16 respondents unanimously expects the Bank of Japan to hold rates this Friday, reinforcing existing expectations. Meanwhile, Japan’s September services Producer Price Index (PPI) was reported at 3.7% year-on-year, in line with forecasts. This outcome removes a potential dovish surprise and maintains a supportive backdrop for December rate hike pricing, further strengthening the case for the BoJ to declare underlying inflation has reached its 2% target.
Further details on Japan’s September services Producer Price Index (PPI) reveal a downward revision to August’s data, making the 3.7% September print more hawkish than initially perceived and indicating accelerating services prices driven by domestic, labour-related pressures. Additionally, the Bank of Japan’s own gauge of underlying inflation has surged to a three-year high, rising above 3% and exceeding the central bank’s 2% target, which further supports the case for continued rate increases.