BofA expects the Bank of Japan to hold its interest rate at 1.25% in October and judge for the first time that underlying inflation has broadly reached its 2% target. The bank still expects a rate hike in December, but markets have already priced in considerable tightening.
Japan’s new core CPI accelerated by 0.5 percentage points year on year in September from August, coming in slightly above market consensus and in line with Goldman Sachs’ forecast. A long holiday contributed to higher accommodation and outbound travel prices, while airfares, some durable goods and dining also added upward pressure. Energy inflation was unchanged, while lower fresh food prices limited the increase in headline inflation.
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.
