On Friday (October 30) during the Asian session, the USD/JPY pair fluctuated, currently trading around 157.60. The Bank of Japan kept its policy rate unchanged at 1.25% on Friday, but made a long-awaited announcement in its quarterly outlook report: underlying consumer inflation has largely met its 2% price stability target and is expected to remain near that level. This statement reinforced the case for further rate hikes.

The 2% target has been met: potential inflation has been achieved, but risks are skewed to the upside.

In its outlook report, the central bank noted that underlying consumer price inflation is broadly in line with its target and is expected to remain near that level. This is based on factors including a persistent sense of labor shortage, the interaction between wages and prices, and medium- to long-term inflation expectations of around 2%. The central bank described price risks as skewed to the upside and warned that inflation expectations could rise and push underlying inflation above the target as businesses increasingly raise wages and prices. The median Committee forecast for core inflation (excluding fresh food) is revised upward to 2.6% for fiscal year 2027 from 2.4%, reflecting rising oil prices since the summer; unchanged at 2.5% for fiscal year 2026 and 2.0% for fiscal year 2028. The central bank expects core inflation to rise significantly above 2% in the first half of the forecast period, driven by factors including rising oil prices, semiconductor prices, and a weaker yen; subsequently, as the effects of high oil prices subside, inflation will fall back to around 2%. Its forecast assumes that Dubai crude oil will fall from around $105/barrel to around $70/barrel by the end of the forecast period and does not account for the impact of the proposed reduction in the food consumption tax. Growth forecasts remain largely unchanged: real GDP is projected to grow by 0.7% in fiscal years 2026 and 2027, and by 0.8% in fiscal year 2028. The central bank expects the economy to grow at a slower pace this fiscal year, with rising energy costs in the Middle East dragging down activity, but government measures and AI-related demand providing support.

Voting and ETFs: 8 to 1 to maintain interest rates, Takada proposes rate hike; ETF sell-off doubles.

The policy committee voted 8-1 to maintain the interest rate. Committee member Hajime Takada dissented, proposing a rate hike to 1.5%, arguing that with potential inflation already at the target, the central bank should accelerate its move towards the neutral rate. No committee members dissented for a rate cut, eliminating a risk that had been a concern in the market before the meeting. The committee also unanimously agreed to more than double the pace of ETF sales starting in January 2027, increasing it from approximately ¥330 billion per year to approximately ¥860 billion based on book value, reducing the time required to complete the sale of holdings from approximately 112 years to approximately 43 years.

Market Impact: Hawkish sentiment supports the yen, boosting short-term yields and December pricing.

This meeting almost met all the hawkish expectations: a 2% rate announcement, upward-biased price risks, an upward revision of inflation forecasts, and dissenting opinions supporting a rate hike, without any split among the doves. This combination should support the yen's performance around 157.8, push up short-term Japanese government bond yields, and solidify approximately 80% of the pricing in a December rate hike. Oil prices are at the heart of the forecast. The central bank assumes Dubai crude oil will fall from around $105 to $70, so a continued rise in oil prices related to the Iranian conflict would increase the upside risk to inflation. Accelerated ETF selling will provide a moderate supply to the Japanese stock market from 2027 onwards, but the 43-year horizon means a relatively small annual impact.

in conclusion

The Bank of Japan kept its interest rate unchanged at 1.25%, but the 8-1 vote, the dissent against Takata's proposal to raise rates to 1.5%, and the statement in its outlook report that "underlying inflation is largely in line with the 2% target, with risks skewed to the upside" constituted a complete hawkish mix. The core CPI forecast for fiscal year 2027 was revised upward to 2.6%, and ETF selling more than doubled. In terms of market impact, this combination should support the yen, push up short-term yields, and solidify the pricing of a December rate hike; the wording of Ueda's press conference will be the final variable in determining whether a December action is imminent. (USD/JPY daily chart, source: FX678) At 13:26 Beijing time, USD/JPY was trading at 157.63/64.