The Bank of Japan kept interest rates steady on Friday but declared victory in a nearly 14-year battle to hit its price target and signalled vigilance against inflationary risks, suggesting scope to hike borrowing costs as soon as December.

With underlying inflation having roughly hit two percent, the central bank must focus on anchoring it around the target, it said, stressing anew that its policy has entered a new, more hawkish phase open to raising rates once every few months.

The pivot aligns the BoJ with its US and European counterparts eyeing near-term rate hikes to battle inflationary risks from the AI boom and the Iran war-induced energy shock.

"Underlying inflation is at a level generally consistent with our price target, and is expected to remain at around that level," it said in a quarterly outlook report.

"Against this backdrop, it will be important to examine the degree to which underlying inflation is anchored around two percent."

At the two-day meeting ending on Friday, the BoJ maintained its policy rate at 1.25 percent in a widely expected move, forgoing a back-to-back hike to spend more time scrutinising the effects of past rate hikes on lending conditions.

Hajime Takata, a hawkish member of the bank's board, dissented over the decision to hold rates, instead proposing unsuccessfully a hike to 1.5 percent.

In a surprise move, the central bank also said it will accelerate the pace of its sales of exchange-traded funds from January to 860 billion yen per year from the current 330 billion yen.

Markets are focusing on governor Kazuo Ueda's post-meeting briefing for clues on the timing and pace of future rate hikes.

In the report, the bank revised up its core consumer inflation forecast for the fiscal year ending March 2028 to 2.6 percent from 2.4 percent projected three months ago.

Declaring victory in hitting its two percent inflation target marks a turning point for the BoJ, which has spent most of its history battling low or negative price growth since gaining legal independence from the government in 1998.

Under former governor Haruhiko Kuroda, the bank deployed massive monetary stimulus in 2013 to pull Japan out of deflation and fire up inflation to the two percent target.

Even after ending its mix of unorthodox easing steps in 2024, the bank has trodden cautiously in raising rates on the view underlying inflation – or price moves excluding one-off factors and driven by domestic demand – remained below target.

With stubbornly high energy costs and rising import prices from a weak yen adding to inflationary pressures, the bank raised rates in September after delivering a hike in June – a shorter interval than the roughly twice-a-year hikes in 2024 and 2025. (Reuters)





Edited by Tony Sabine