Bank of Japan holds rates, says inflation trend hits target for first time

The Bank of Japan held its benchmark rate untouched while indicating for the first time that underlying inflation has reached its 2% target, a milestone that opens the door to a hike as soon as December.

The BOJ maintained its policy settings at 1.25% at the end of a two-day meeting Friday, according to its statement. All economists surveyed by Bloomberg had predicted that outcome.

The achievement of the inflation target means the bank now needs to shift from coaxing inflation higher to ensuring that it doesn’t overshoot the target rate. The BOJ said it’s “vital” to keep inflation around the current level going forward as it warned of the risk of underlying inflation deviating above its target. In light of the upside risks of inflation, more than 80% of economists expect another hike in December.

”During the Ueda’s presser this afternoon, with market expectations for a December rate hike already this high, I want to see whether the BOJ will reinforce those expectations or maintain a neutral stance,” said Junya Takemoto, senior economist at Sumitomo Mitsui Banking Corp. “In the past, Ueda has made comments at his press conferences suggesting that the BOJ would closely assess developments ahead of the next meeting.”

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The BOJ also said it would nearly triple the pace of sales of its holdings of Exchange-Trade Funds starting in January at an estimated pace of about ¥860 billion ($5.5 billion) per year. It said it would take about 43 years to finish the process, compared with a previous pace that would have taken more than 110 years.

The yen strengthened to around 157.12 per dollar from 157.52 just before the decision.

The focus now falls on Governor Kazuo Ueda’s press briefing around 3:30 p.m. local time. Investors will listen closely for signals guiding the next hike — and any clues on how high rates will go in the current tightening cycle.

The BOJ was the last of three major central banks to meet this week, with the Federal Reserve and European Central Bank also standing pat. Last month, they all raised rates in sync for the first time.

For the BOJ, a back-to-back hike would have been without precedent this century, and could have spooked markets. Japan’s benchmark rate is already at a 31-year high, although remains low compared to Group of Seven peers.

The rate decision was by an 8-1 vote, with Hajime Takata dissenting in favor of a rate hike.

The central bank raised borrowing costs on Sept. 18, three months after a hike in June, representing the shortest interval between rate increases since 1990.