Why is the rate decision not the focus of the October meeting?

  • BofA expects the Bank of Japan to hold its policy rate at 1.25% by an 8-to-1 vote at its meeting on 29 October–30, with only board member Hajime Takata voting for a hike.
  • The bank believes rate hikes at two consecutive meetings would require a risk of underlying inflation significantly overshooting the target, or evidence that inflation has already overshot it; data since the September meeting are insufficient to change that assessment.
  • If at least 3 board members vote for a hike, it would be a clear hawkish surprise: it would mean concern about an inflation overshoot has spread to some centrist members and could push up market expectations for short-term rates and the terminal rate.

Why does inflation reaching the target not imply faster rate hikes?

  • BofA expects the Bank of Japan to judge in its outlook report for the first time that underlying inflation is broadly consistent with its 2% price stability target. The indicators the central bank consults include CPI-related measures and inflation expectations: some remain below target, but most have converged around 2%.
  • The policy stance had already shifted: from April, the central bank said underlying inflation was approaching 2%, and by July it had placed greater emphasis on preventing an inflation overshoot. BofA therefore expects a judgment that the target has been reached to support further tightening, without materially changing policy guidance.
  • BofA expects the Bank of Japan to continue to regard financial conditions as accommodative. Recent surveys show little deterioration in corporate financial conditions or banks' lending attitudes, while corporate profit forecasts have also been revised sharply upward, helping companies absorb higher financing costs.

Where does BofA expect rates to peak?

  • BofA's base case is for one rate hike each in December 2026, March 2027 and July, taking the policy rate from 1.25% to 2%. The bank expects Kazuo Ueda's post-meeting remarks to reinforce expectations of quarterly hikes, but says he is unlikely to commit explicitly to specific timing.
  • As rates approach 2%, the bar for further hikes will rise: how far rates are from neutral becomes more uncertain, and board members may discuss the lagged effects of previous hikes on financial conditions more extensively; rising borrowing costs could also provoke government opposition.
  • But if government resistance delays expectations of rate hikes, it could also weaken the yen and intensify inflationary pressure. BofA therefore believes policy normalization may slow, while the terminal rate risks rising above its 2% base case.

How else might markets react?

  • Rate markets have already priced in considerable tightening: as of the report, the market-implied probability of a 25-basis-point hike in December exceeded 80%, and the one-year overnight index swap rate starting one year forward was about 2.15%. BofA therefore sees limited room for the October meeting to drive short-term yen rates substantially higher.
  • The bank believes a clear hawkish surprise would likely require Kazuo Ueda to hint at faster hikes or state more explicitly that rates need to rise well above 2%; neither is likely at this meeting.
  • In foreign exchange, BofA believes the dollar remains the main driver of USD/JPY; if more than one member dissents in favor of a hike, the yen has room to strengthen. A correction in AI-related stocks and a reversal of hedging flows could also support the yen.