BOJ Rate Hold Seen as Done Deal, Putting Focus on Guidance

By Megumi Fujikawa

TOKYO--The Bank of Japan is poised to keep interest rates at three-decade highs this week, pausing as it gauges the impact of prior tightening on inflation and growth.

With markets virtually certain that the central bank will hold the policy rate at 1.25%, all eyes are on what clues Gov. Kazuo Ueda could give about the timing of the next rate hike.

On Hold: If the BOJ does hold steady at its two-day gathering ending Friday, that doesn't mean it is slowing the pace of policy normalization. Its last hike in September followed one in June--an acceleration that has fueled speculation that the central bank is leaning toward quicker rate increases.

Reflecting persistent inflationary concerns, the overnight index swaps market is pricing in about an 80% chance of a 25-basis-point hike in December to 1.5%.

The Forecasts: Traders will scrutinize the BOJ's quarterly outlook report for updated growth and price projections to gauge if policymakers see a case for another hike by year-end.

According to people familiar with the BOJ's thinking, the top risks for Japan's economy remain the Middle East conflict, yen weakness and artificial intelligence-related demand. There is a broad consensus among the policy board that underlying inflation is near the 2% target, though officials might need more time to judge whether that is sustainable, the people said.

Forex Factor: A critical swing factor for the yen is what signals markets take away from the Federal Reserve's policy meeting this week, which precedes the BOJ's. The Fed is also widely expected to hold rates steady, even as lingering inflationary pressures keep the door open to further tightening.

Despite efforts by Tokyo and Washington to stem the yen's weakness earlier this year, the Japanese currency remains near the psychologically sensitive 160 level against the dollar, sustaining upward pressure on import prices.

How Far? One of the burning questions is how far the BOJ is prepared to lift its policy rate. With the September hike, interest rates are now in the 1.1% to 2.5% range that the bank considers neither stimulating nor restricting the economy.

Even so, policymakers likely continue to view financial conditions as accommodative, leaving room for further tightening, people familiar with the BOJ's thinking said.

Ueda: Investors will cling to Ueda's every word at his usual post-meeting briefing for hints on what the BOJ might do at its final meeting of the year in December.

A key phrase to watch is if the governor says rate decisions will be made "at every meeting" or if he shifts to wording such as discussing them "at upcoming meetings," said Daiwa Securities economist Kento Minami.

"While the former avoids pointing to any specific gathering, a pivot toward the latter-placing greater emphasis on the next meeting-would likely be interpreted by markets as strengthening the case for a December rate hike," Minami said.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

(END) Dow Jones Newswires

October 28, 2026 00:36 ET (04:36 GMT)