Daiwa’s reading points to a BOJ that is not in a hurry but has not finished hiking, which keeps the yen supported on any sign that wage growth is becoming entrenched. A hold at the 29-30 October meeting, paired with an upgraded inflation assessment, would keep a December hike in play and could lift short-dated Japanese government bond yields. Oil is a key swing factor: Daiwa notes import prices have started rising again on higher crude, and any further jump in oil linked to the Iran war would add to the risk of inflation overshooting, strengthening the case for faster tightening. For Japanese equities, gradual hikes alongside solid capital spending are unlikely to derail the market, though a faster pace would test valuations. Long-dated JGBs, where yields have already risen above 3%, remain sensitive to any shift in the BOJ’s tone.
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After decades of trying to get inflation up to 2%, the Bank of Japan’s new problem is making sure it stays there, and Daiwa says the answer will be found in next spring’s pay packets.
Summary:
Daiwa says the BOJ is shifting from trying to lift underlying inflation to 2% to keeping it stable around that level.
Governor Kazuo Ueda said on 16 October that underlying inflation is broadly close to 2% and that a further rise from here cannot be tolerated.
The BOJ is expected to hold its 1.25% policy rate on 29-30 October but may upgrade its inflation assessment, with a December hike reportedly not ruled out.
Japan’s largest union group, Rengo, is considering seeking pay rises of 5% or more in 2027 for a fourth straight year, with an aim of 6%.
Daiwa says the durability and breadth of wage gains, including at smaller firms, will be key to the timing of future hikes.
Import prices have started rising again on higher crude oil, adding to inflation risks.
The Bank of Japan is entering a new phase in which its goal is no longer to lift inflation to 2% but to keep it there, according to Daiwa Securities, which says the durability of wage growth will be key to the timing of further rate increases.
At a press conference on 16 October, Governor Kazuo Ueda said underlying inflation was broadly close to 2% and that a further rise from that level could not be tolerated. He indicated that while the central bank had previously been willing to let underlying inflation climb toward its target, keeping it firmly anchored around 2% would now be a central policy objective. Daiwa said the remarks confirm a shift it had previously identified, from a policy of reaching 2% to one of stabilising inflation at that level.
Ueda said the policy board would discuss in depth whether underlying inflation has reached 2% at its meeting on 29 and 30 October. Citing reports, Daiwa said the BOJ is likely to leave its policy rate at 1.25% at that meeting but may upgrade its assessment of underlying inflation to broadly around 2%. That would not be treated as an immediate achievement of the price target, and the central bank is expected to keep raising rates while financial conditions remain accommodative, with a December hike reportedly not ruled out.
Daiwa said there is no need to accelerate the pace of rate increases, given that consumer spending remains weak even as business investment holds up. Core machinery orders rose 5.2% in August, pointing to resilient capital spending, including in AI-related sectors. Equally, it argued that inflation pressures have not clearly faded. Corporate goods prices rose 6.8% from a year earlier in September, easing from 7.6% in August but still elevated, while import prices have begun rising again on the back of higher crude oil prices.
The bank sees next year’s spring wage negotiations as the key test of whether inflation has become established. Rengo, Japan’s largest trade union federation, is reportedly considering calling for pay rises of 5% or more in 2027, the fourth straight year at that level, with a higher target of 6% or more for smaller firms and an aim of around 6% overall. This year’s negotiations delivered rises of about 5%, though gains at smaller companies were lower at around 4.7%.
Daiwa said what matters is not just the headline figure but whether strong pay rises become a lasting norm and spread from large companies to smaller ones. More detail will emerge over the coming months, including Rengo’s basic plan in October and the business lobby Keidanren’s position in November, giving the BOJ a clearer read by its December meeting.
For now, Daiwa expects the October meeting to centre on the BOJ’s assessment of underlying inflation, with evidence of entrenched wage and price gains, and any signs of an overshoot, deciding the timing and pace of future hikes.
This article was written by Eamonn Sheridan at investinglive.com.
