Barclays: Bank of Japan expected to pause rate hikes in October, inflation assessment could pave the way for December
Barclays expects the Bank of Japan to keep its policy rate at 1.25% in October while upgrading its assessment of underlying inflation to broadly consistent with the 2% target. Financial conditions remain accommodative, supporting subsequent rate hikes every three to four months, but weaker domestic demand and a subsequent decline in inflation limit the room for tightening.
Original source：BarclaysFirst published on Unhidea：Original source date：
Key takeaway
Barclays believes underlying inflation near the target and still-accommodative financial conditions will support the Bank of Japan resuming rate hikes in December and reaching 2% in July 2027. Whether it can stop thereafter depends on the decline in inflation, changes in board membership and the yen’s trajectory.
Why might the policy signal still lean hawkish if rates are unchanged in October?
Barclays expects the Bank of Japan to keep its policy rate at 1.25% at its October 29–30 meeting, but to change its assessment of underlying inflation from “approaching 2%” to “broadly at a level consistent with the 2% target.” The policy focus will shift from approaching the target to whether inflation can remain near it sustainably and stably.
The reason for pausing is to observe the cumulative effects of the September rate hike and earlier tightening. A threshold remains between underlying inflation reaching the relevant level and achieving the target sustainably; the Tankan survey released before the December meeting will help the central bank assess financial conditions and inflation expectations before deciding whether to raise rates.
Domestic demand has already weakened. What supports the case for further hikes?
Real GDP grew at an annualized quarter-on-quarter rate of 1.4% in the second quarter of 2026, but consumption was flat and capital spending fell 3.6% quarter on quarter, declining for a second consecutive quarter. Beneath the headline growth, domestic demand was not strong, leading Barclays to retain a cautious assessment.
Support comes from wages and businesses: through August, fixed cash earnings had risen by at least 3% year on year for eight consecutive months; the September Tankan showed global AI-related demand driving an improvement in manufacturing sentiment, while corporate recurring profits also significantly exceeded expectations. Barclays is therefore more inclined to view weak consumption and investment as a temporary pause.
Rate hikes have also yet to significantly tighten corporate financing conditions: in the Tankan, a net majority of companies still reported easy funding conditions, and loan growth was strong. Barclays’ analysis suggests business sentiment has a greater effect on funding conditions than interest rates; unless the operating environment deteriorates sharply, financial conditions could remain accommodative even if rates rise to 2%.
What opposing forces are affecting inflation, and why is one forecast expected to fall while another rises?
Excluding special factors, core CPI rose 2.6% year on year in August, while core-core CPI, excluding fresh food and energy, rose 2.2%. But the pass-through from wages to prices has weakened from its 2025 peak, and falling rice prices are also putting downward pressure on inflation; Barclays’ composite measure of inflation expectations eased in the third quarter but remained around 2%.
On the other side are the gradual pass-through of the effects of developments in the Middle East to prices and a possible upward revision to the oil price outlook. Barclays expects the Bank of Japan to slightly lower its inflation forecast for fiscal 2026 and raise its forecast for fiscal 2027: the former reflects published data coming in below the central bank’s assumptions, while the latter reflects the delayed pass-through of cost shocks.
Inflation expectations in Japan are highly responsive to past actual inflation, so a renewed rise in prices could push expectations higher again. This is the key mechanism behind Barclays’ view that the central bank still needs to guard against upside risks to underlying inflation and gradually reduce accommodation.
Why are rates expected to reach 2%, and why might they stop there?
Barclays maintains its projected path of rate hikes in December 2026, March 2027 and July, ultimately reaching 2%. Besides upside inflation risks, the US government’s concern about yen weakness could also push the interval between hikes down from the previous roughly six months to three to four months.
The basis for stopping is the bank’s forecast that core-core CPI will rise to around 2.6% in spring 2027 before falling and stabilizing around 2% from autumn. At the same time, the terms of two hawkish board members expire in July, and the Takaichi government could appoint more dovish successors, weakening support for further hikes.
There are still conditions under which the 2% endpoint could move higher: Barclays believes the hiking cycle could be extended if the yen remains weak or the US government further influences nominations to the Bank of Japan’s board.
