Bank of Japan Meeting Preview: Hawks Hold Steady
2026-10-30 02:30:23
According to the latest schedule, this policy meeting will be held from October 29th to 30th, followed by another policy meeting in December of this year. This will be the Bank of Japan's second-to-last monetary policy meeting in 2026. After raising the policy rate to 1.25% in September, the Bank of Japan is expected to make a hawkish decision to hold the rate steady at tomorrow's (October 30th) meeting. Market focus will be on the release of the October "Economic and Price Outlook Report," which will include updated forecasts for growth and inflation. If the core CPI forecasts for fiscal years 2027 and 2028 remain above 2%, it will support expectations of a rate hike to 1.75%-2.00% next year. 
It is worth emphasizing that since exiting negative interest rates and beginning this round of interest rate hikes in March 2024, the Bank of Japan has gradually raised its policy rate from 0% to 1.25%. Currently, the Bank of Japan's supplementary deposit facility rate is 1.25% (effective September 24, 2026), and the base lending rate is 1.5%. The market generally believes that this round of "normalization" has entered its later stages; therefore, the Bank of Japan's statement on the future path of interest rate hikes at this meeting will be more informative than whether interest rates will change themselves. Price expectations remain far above 2% . After raising interest rates by 25 basis points to 1.25% in September, the core signals released by the Bank of Japan are basically consistent with previous statements—upside risks to prices remain, real interest rates are still negative, and policy rates should continue to be raised in the future. Perhaps the only reason why a rate hike is not expected at the October 30 meeting is that since the Bank of Japan gained monetary policy independence in 1998, it has never raised interest rates at two consecutive meetings. Therefore, a rate hike in October may be perceived as "eager." Behind this widely anticipated "no change" decision, the market will focus on the voting pattern. The Bank of Japan's Monetary Policy Committee has nine members. At its September meeting, it passed a resolution to raise interest rates by 25 basis points to 1.25% with 7 votes in favor and 2 against. The dissenting votes mainly came from hawkish members who advocate for more aggressive tightening. Will hawkish member Hayato Tada again vote against consecutive rate hikes? His advocacy for rate hikes is not surprising; what is truly noteworthy is whether others will join his camp. If more than one member votes against "holding rates steady," it will signal to the market that a consensus on "consecutive rate hikes" is gradually forming internally, potentially boosting the yen and raising market pricing in a December rate hike. Conversely, if the vote is almost unanimously "no change," it indicates that most members prefer to wait for more data and proceed cautiously. The October outlook report will also be closely watched. The July report was quite hawkish—the median forecasts for core inflation (excluding food and energy) in fiscal years 2027 and 2028 were 2.6% and 2.2%, respectively. Let's see how the new report will adjust these figures. It's important to note that the forecasts in this outlook report were prepared against the backdrop of a continued weakening of the yen in the first half of this year and a rise in international oil prices. If the core CPI forecasts for fiscal years 2027 and 2028 remain above 2%, or even revised upwards from July, it will strengthen market expectations of a rate hike to 1.75%-2.00% next year; conversely, if revised downwards due to weak domestic demand, it could be interpreted as a dovish signal, thus delaying market pricing in the timing of a rate hike. Furthermore, the report will update its economic growth forecasts—with the dual constraints of slowing export growth and weak consumption recovery, the risk of downward revisions to growth forecasts should not be ignored. For the Bank of Japan, perhaps a reassuring signal is that inflation expectations have not worsened. The September Tankan survey showed that corporate inflation expectations have slightly declined from their previous highs, and the PPI (Producer Price Index) is also showing initial signs of peaking. Specifically, the median inflation expectations of businesses over the next one, three, and five years have all slightly declined from their peaks, but remain stably above the Bank of Japan's 2% target. This pattern of "stabilizing at a high level" rather than "significantly declining" is interpreted internally by the central bank as a positive signal—it proves that the 2% inflation target is gradually being internalized by the market, and there is no risk of "decoupling" requiring strong policy intervention. At the same time, the convergence of the year-on-year PPI increase means that upstream cost pressures are easing, providing downstream companies with room to maintain prices and avoid "double-dip inflation." Overall, the current inflationary environment supports the central bank's continued gradual interest rate hikes, but does not yet constitute a reason for a one-off large-scale tightening. Market Reaction The market is currently pricing in an 80% probability of a 25 basis point rate hike in December, followed by a cumulative 50 basis point rate hike by September next year. A recent survey of economists shows that analysts generally expect the Bank of Japan (BOJ) to raise its policy rate to 1.5% in December, and then maintain a pace of approximately one rate hike per quarter, consistent with the BOJ's communication stance of "deciding on a data-driven basis." At the same time, there is a tension between the market and the government—the Japanese government wants the BOJ to slow its pace of debt management and fiscal expansion, but inflationary pressures and yen depreciation pressures force the BOJ to maintain a tightening stance. Some institutions, based on the revised Taylor rule, estimate that the BOJ's "theoretically reasonable interest rate" is around 1.35%, meaning that a 25 basis point rate hike (to 1.5%) is already sufficiently justified, while further upward movement is relatively limited. Cooling inflation, weak demand, and Japan's flat Phillips curve do not support overly aggressive tightening. Therefore, the arguments against the BOJ raising interest rates to the 1.75%-2.00% range are not sufficient. Against this backdrop, the BOJ remains concerned about the weak yen, expanding AI demand, and high energy prices. Based on Friday's Bank of Japan decision, there seems to be no clear reason for significant fluctuations in market interest rates or the yen. The current USD/JPY exchange rate movement is primarily driven by the USD/JPY interest rate differential – although inflation has retreated from its peak, Federal Reserve policymakers continue to emphasize a "data-driven" approach, leading to fluctuating expectations of short-term rate cuts and providing support for the dollar. Coupled with the yen's own interest rate hike cycle and increased sensitivity to interest rate differentials, a hawkish Federal Reserve will likely keep the USD/JPY exchange rate within a wide range of 157-159 until the end of the year. It is worth noting that if the Bank of Japan sends a more hawkish signal than the market expects, or if the Federal Reserve turns dovish, it could trigger a rapid appreciation of the yen, causing the exchange rate to deviate from its current range. For Friday, a low-probability but high-impact risk is that the Japan Government Pension Investment Fund (GPIF) may announce a reallocation of funds domestically. GPIF is one of the world's largest pension funds, and any significant adjustment to its asset allocation will directly impact the Japanese stock and bond markets. We have previously argued that increasing the allocation to domestic securities will support the government's massive investment plans. Historical experience shows that the GPIF's decision in October 2014 to increase its domestic stock allocation ratio coincided with the Bank of Japan's expansion of QQE (quantitative and qualitative easing). This combination triggered a sharp depreciation of the yen and a rise in Japanese stocks, making it one of the most memorable instances of such allocation adjustments. Although Japanese government officials have repeatedly stated that they have "no intention to adjust the GPIF's allocation structure in the short term," and the market has already priced in such expectations, as a low-probability, high-impact event, any hint of increasing domestic asset allocation—even just a change in wording—could trigger unilateral fluctuations in the yen. For forex traders, this is the most anticipated "black swan" scenario besides Friday's decision.
It is worth emphasizing that since exiting negative interest rates and beginning this round of interest rate hikes in March 2024, the Bank of Japan has gradually raised its policy rate from 0% to 1.25%. Currently, the Bank of Japan's supplementary deposit facility rate is 1.25% (effective September 24, 2026), and the base lending rate is 1.5%. The market generally believes that this round of "normalization" has entered its later stages; therefore, the Bank of Japan's statement on the future path of interest rate hikes at this meeting will be more informative than whether interest rates will change themselves. Price expectations remain far above 2% . After raising interest rates by 25 basis points to 1.25% in September, the core signals released by the Bank of Japan are basically consistent with previous statements—upside risks to prices remain, real interest rates are still negative, and policy rates should continue to be raised in the future. Perhaps the only reason why a rate hike is not expected at the October 30 meeting is that since the Bank of Japan gained monetary policy independence in 1998, it has never raised interest rates at two consecutive meetings. Therefore, a rate hike in October may be perceived as "eager." Behind this widely anticipated "no change" decision, the market will focus on the voting pattern. The Bank of Japan's Monetary Policy Committee has nine members. At its September meeting, it passed a resolution to raise interest rates by 25 basis points to 1.25% with 7 votes in favor and 2 against. The dissenting votes mainly came from hawkish members who advocate for more aggressive tightening. Will hawkish member Hayato Tada again vote against consecutive rate hikes? His advocacy for rate hikes is not surprising; what is truly noteworthy is whether others will join his camp. If more than one member votes against "holding rates steady," it will signal to the market that a consensus on "consecutive rate hikes" is gradually forming internally, potentially boosting the yen and raising market pricing in a December rate hike. Conversely, if the vote is almost unanimously "no change," it indicates that most members prefer to wait for more data and proceed cautiously. The October outlook report will also be closely watched. The July report was quite hawkish—the median forecasts for core inflation (excluding food and energy) in fiscal years 2027 and 2028 were 2.6% and 2.2%, respectively. Let's see how the new report will adjust these figures. It's important to note that the forecasts in this outlook report were prepared against the backdrop of a continued weakening of the yen in the first half of this year and a rise in international oil prices. If the core CPI forecasts for fiscal years 2027 and 2028 remain above 2%, or even revised upwards from July, it will strengthen market expectations of a rate hike to 1.75%-2.00% next year; conversely, if revised downwards due to weak domestic demand, it could be interpreted as a dovish signal, thus delaying market pricing in the timing of a rate hike. Furthermore, the report will update its economic growth forecasts—with the dual constraints of slowing export growth and weak consumption recovery, the risk of downward revisions to growth forecasts should not be ignored. For the Bank of Japan, perhaps a reassuring signal is that inflation expectations have not worsened. The September Tankan survey showed that corporate inflation expectations have slightly declined from their previous highs, and the PPI (Producer Price Index) is also showing initial signs of peaking. Specifically, the median inflation expectations of businesses over the next one, three, and five years have all slightly declined from their peaks, but remain stably above the Bank of Japan's 2% target. This pattern of "stabilizing at a high level" rather than "significantly declining" is interpreted internally by the central bank as a positive signal—it proves that the 2% inflation target is gradually being internalized by the market, and there is no risk of "decoupling" requiring strong policy intervention. At the same time, the convergence of the year-on-year PPI increase means that upstream cost pressures are easing, providing downstream companies with room to maintain prices and avoid "double-dip inflation." Overall, the current inflationary environment supports the central bank's continued gradual interest rate hikes, but does not yet constitute a reason for a one-off large-scale tightening. Market Reaction The market is currently pricing in an 80% probability of a 25 basis point rate hike in December, followed by a cumulative 50 basis point rate hike by September next year. A recent survey of economists shows that analysts generally expect the Bank of Japan (BOJ) to raise its policy rate to 1.5% in December, and then maintain a pace of approximately one rate hike per quarter, consistent with the BOJ's communication stance of "deciding on a data-driven basis." At the same time, there is a tension between the market and the government—the Japanese government wants the BOJ to slow its pace of debt management and fiscal expansion, but inflationary pressures and yen depreciation pressures force the BOJ to maintain a tightening stance. Some institutions, based on the revised Taylor rule, estimate that the BOJ's "theoretically reasonable interest rate" is around 1.35%, meaning that a 25 basis point rate hike (to 1.5%) is already sufficiently justified, while further upward movement is relatively limited. Cooling inflation, weak demand, and Japan's flat Phillips curve do not support overly aggressive tightening. Therefore, the arguments against the BOJ raising interest rates to the 1.75%-2.00% range are not sufficient. Against this backdrop, the BOJ remains concerned about the weak yen, expanding AI demand, and high energy prices. Based on Friday's Bank of Japan decision, there seems to be no clear reason for significant fluctuations in market interest rates or the yen. The current USD/JPY exchange rate movement is primarily driven by the USD/JPY interest rate differential – although inflation has retreated from its peak, Federal Reserve policymakers continue to emphasize a "data-driven" approach, leading to fluctuating expectations of short-term rate cuts and providing support for the dollar. Coupled with the yen's own interest rate hike cycle and increased sensitivity to interest rate differentials, a hawkish Federal Reserve will likely keep the USD/JPY exchange rate within a wide range of 157-159 until the end of the year. It is worth noting that if the Bank of Japan sends a more hawkish signal than the market expects, or if the Federal Reserve turns dovish, it could trigger a rapid appreciation of the yen, causing the exchange rate to deviate from its current range. For Friday, a low-probability but high-impact risk is that the Japan Government Pension Investment Fund (GPIF) may announce a reallocation of funds domestically. GPIF is one of the world's largest pension funds, and any significant adjustment to its asset allocation will directly impact the Japanese stock and bond markets. We have previously argued that increasing the allocation to domestic securities will support the government's massive investment plans. Historical experience shows that the GPIF's decision in October 2014 to increase its domestic stock allocation ratio coincided with the Bank of Japan's expansion of QQE (quantitative and qualitative easing). This combination triggered a sharp depreciation of the yen and a rise in Japanese stocks, making it one of the most memorable instances of such allocation adjustments. Although Japanese government officials have repeatedly stated that they have "no intention to adjust the GPIF's allocation structure in the short term," and the market has already priced in such expectations, as a low-probability, high-impact event, any hint of increasing domestic asset allocation—even just a change in wording—could trigger unilateral fluctuations in the yen. For forex traders, this is the most anticipated "black swan" scenario besides Friday's decision.
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