Japan Week Ahead: BOJ Set to Leave Policy Rate at 1.25% as Its Mission Shifts from Normalizing Super-Low Rates to Keeping Underlying Inflation from Overshooting 2% Target

–October Tokyo CPI Inflation Expected to Remain Close to 3% as Metropolitan Government’s Summer Water Subsidies End, Base Effect of Free Daycare Servies Wanes

–September Factory Output Seen Posting Modest Rebound on Global AI Projects, Auto Recovery; Retail Sales Boosted by Cooler Weather, Holiday Streak  

By Max Sato

(MaceNews) – Bank of Japan Governor Kazuo Ueda has sent a clear message that there is no need for a back-to-back interest rate hike this month but that it will have to lift the policy rate further into a neutral zone to keep inflation from running far north of the bank’s 2% target.

At its Oct. 29-30 meeting, the BOJ’s nine-member board is expected to leave the target for the overnight interest rate unchanged at 1.25% in a unanimous or majority vote after raising it to that level from 1% in a 7 to 2 vote in September amid growing upside risks to price stability.

Judging from recent remarks by Governor Ueda, the bank is on course toward a few more rate hikes to reduce the degree of monetary stimulus but upside risks to inflation is not urgent enough to require a consecutive action.

After the September rate hike, the governor told reporters that actions like over-sized or back-to-back rate hikes are usually taken when there is a risk of inflation rising fast beyond target or it is already above target, as seen in Europe and the United States in 2022 and 2023. “We are making various pre-emptive adjustments now so that as a result, we can reduce the possibility of being forced to raise rates rapidly that would create unexpected circumstances for the economy and markets,” he said.

More recently, Ueda reminded that the bank’s policymakers must stay ahead of the inflation control game given that the consumer price index is a lagging indicator.

“We have allowed underlying inflation to gradually move up toward 2% from a lower point, but now that it is largely close to 2%, there has been a shift in our stance: We can no longer tolerate further increases and our primary policy goal is now to ensure that it stabilizes around 2%,” Ueda told a news conference in Bangkok on Oct. 16 after a meeting of top financial policymakers from the Group of 20 economies.

Board member Junko Koeda, a former economics professor, told business leaders in Kumamoto City in southwestern Japan on Oct. 15 that the bank needs to continue raising rates to remove excess stimulus effects of large-scale easing conducted for a decade from 2013. “Given that there have been considerable upside risks to prices in addition to continued accommodative financial conditions, the bank should not become overly cautious about raising the policy interest rate,” she said.

BOJ officials are monitoring the cumulative effects of their six interest rate increases in the current normalization process launched in April 2024. The most likely scenario is to raise the policy rate to 1.50% from 1.25% in December or January and further to 1.75% in March or April. That would follow the BOJ’s 25-basis point hike each in September and June, an accelerated pattern of lifting borrowing costs every three to four months, instead of a more gradual pace of twice a year.

The nine-member board is roughly divided into four groups. Since taking office in April 2023, Governor Ueda has been leading a mission to normalize the bank’s policy stance. A decade of large-scale easing from 2013 under his predecessor Haruhiko Kuroda produced sides effects of killing bond market functions and squeezing lender’s profit margins with zero to negative interest rates and massive liquidity injections into the financial system.

Ueda is no stranger to the BOJ’s complex policy-setting. He served as a board member from 1998 to 2005 when Japan’s economy was reeling from financial failures. Working closely in sync with Ueda are two deputies. Shinichi Uchida, a career central banker, has been behind drawing up monetary policy plans in the past few decades. Ryozo Himino is a former Ministry of Finance official who once headed the Financial Services Agency, the government watchdog of the industry.

At the hawkish end of the policy spectrum are Hajime Takata, formerly with Mizuho Securities, and Naoki Tamura, who hailed from the Sumitomo Mitsui banking group. Those two have been advocating rate hikes at a faster pace to keep the bank from falling behind the curve. They represent the financial industry’s view that super-low interest rates were killing bond market functions and squeezing lender profit margins.

Junko Koeda, a former economics professor, and Kazuyuki Masu, who came from the trading firm Mitsubishi Corp., appear to be neutral. They have supported the policy direction of Governo Ueda who chairs board meetings.

Sitting on the dovish end are two academics: Toichiro Asada and Ayano Sato. They were both picked by Prime Minister Sanae Takaichi, who has expressed objections to rate hikes in the past. Since Asada joined the board in April, he has voted against all the rate hikes, one in June and the other in September. Sato became a board member in June and dissented last month.

Given this composition of the rate-setting panel, the bank may act in one voice if the chair of the board proposes no change in policy, as widely expected. Takata or Tamura may start campaigning for the next rate increase on Friday, setting the stage for an action at the next meeting on Dec. 17-18.

On the data front, the Tokyo CPI for October is forecast to show that inflation stayed high at 2.7% to 2.8% in all three key measures. But that’s because the price-cutting impact of the prefecture’s unique fiscal support programs has waned. The national average CPI was tamer, just above the bank’s 2% target in September.

Services inflation has now picked up from low levels to 2%, reflecting wage hikes, which is good news for sustained economic growth. At the same time, that will add to upward pressures on consumer prices. September jobs data is set to show continued tight labor conditions.

Industrial production is expected to post its first increase in three months in September, backed by global demand for equipment to make memory chips for artificial intelligence projects and the recent pickup in the auto sector. Retail sales are forecast to post their seventh straight year-on-year rise in September as an early arrival of cooler weather propped up demand for autumn clothing and the longer-than-usual Silver Week holidays boosted spending by both domestic and overseas shoppers.

Tuesday, Oct. 27
TBA – The Cabinet Office releases the government’s monthly economic report for October. The September report was released at around 1515 JST on Sept. 29 (0615 GMT/0215 EDT the same day), about one to two hours earlier than usual.

The government is expected to maintain its overview that the economy is “recovering at a moderate pace” and that the moderate recovery will continue in the near term. It is also likely to repeat its warning about rising costs under the protracted Iran war and weak yen as well as the drag from a powerful earthquake that rocked the southwestern prefecture of Kumamoto in August and a series of severe rain storms that battered many regions for more than a month through late September.

Thursday, Oct. 29
The Bank of Japan board holds a two-day policy meeting.

Thursday, Oct. 29
1400 JST (0500 GMT/0100 EDT Wednesday, Oct. 28) The Cabinet Office releases October consumer confidence survey conducted around the middle of the month.

The September survey released on Oct. 5 indicated that sentiment among households with two or more people continued to show signs of a pickup. The seasonally adjusted index was nearly flat, down just 0.1 point at 35.4, after edging up 0.6 point to a six-month high of 35.5 in August. Of the four subindexes comprising the main index, those on economic wellbeing and willingness to buy durable goods marked their first drops in five months while those on incomes and employment rebounded slightly.

Friday, Oct. 30
0830 JST (2330 GMT/1930 EDT Thursday, Oct. 29) The Ministry of Internal Affairs and Communications releases October Tokyo CPI.
Mace News median: total CPI +2.7% y/y (range: +2.4% to +2.9%) vs. Sept +2.7%; core CPI (ex-fresh food) +2.7% (range: +2.4% to +2.8%) vs. Sept +2.7%; core-core CPI (ex-fresh food, energy) +2.8% (range: +2.5% to +3.0%) vs. Sept +3.0%

Consumer inflation in Tokyo, a leading indicator of the national trend, is expected to remain high in October after surging in September when the metropolitan government’s water subsidies for the peak summer months ended for some households and the price-cutting base-year effect of free daycare services waned. Nationwide subsidies for fuels and utilities (electricity and natural gas) are still keeping energy prices below year-earlier levels, providing a slight downward pressure.

All three key CPI measures are now above the Bank of Japan’s 2% price stability target. Without the effects of fiscal support programs for households, inflation is expected to stay elevated for now. High energy, import and labor costs are forcing firms in many sectors to raise prices. The Mideast conflict lingers on while the yen remains under year-earlier levels, eroding Japan’s purchasing power. 

The core measure (excluding fresh food) is forecast at a 2.7% rise on year after surging to a 10-year high of 2.7% in September from 1.8% in August. The core rate hit a recent peak at 3.6% in May 2025 when processed food price hikes were sharp in the aftermath of domestic rice shortages.

The annual rate of the total CPI is also expected to stay elevated at 2.7% in the capital after soaring to a 10-month high of 2.7% in September from 1.9% in August. The year-on-year increase in the core-core CPI (excluding fresh food and energy), which is not directly impacted by fuel and utility subsidies, is seen at 2.8% after jumping to a 13-month high of 3.0% in September from 2.0% previously.

At its Oct. 29-30 meeting, the Bank of Japan’s nine-member board is expected to leave the target for the overnight interest rate at 1.25% after raising it to the level from 1% in September amid growing upside risks to inflation. The board is also expected to repeat its recent statement that the bank will continue to raise the policy interest rate toward a more neutral level.

BOJ policymakers are mulling over the timing of the next rate hike by watching the three main risk factors: the impact of the Mideast conflict, strong global demand to develop artificial intelligence and fluctuations in foreign exchange rates. Many market participants expect the bank to raise the policy rate at its next meeting on Dec. 17-18 after confirming whether the economy remains resilient despite the drag from the protectionist U.S. trade policy, the Iran war and natural disasters.

Friday, Oct. 30
0830 JST (2330 GMT/1930 EDT Thursday, Oct. 29) The Ministry of Internal Affairs and Communications releases September unemployment rate.
Mace News median: 2.5% (range: 2.4% to 2.5%) vs. 2.5% in August, 2.4% in July, 2.5% in June, 2.5% in May, 2.5% in April, 2.7% in March, 2.6% in February, 2.7% in January, 2.6% from August to December 2025, 2.4% in July 2025, which was a four-month low.

The seasonally adjusted unemployment rate in Japan is expected to remain low at 2.5% in September amid lingering labor shortages after ticking up to 2.5% in August. The jobless rate fell to a 12-month low of 2.4% in July from 2.5% seen in the previous three months and 2.7% in March.

The national average unemployment remains below the rates in other major economies. Labor shortages continue in the sectors with long work hours and lower pay, notably daycare, medical, transport and construction. Last year, unemployment was stuck at 2.6% from September to December after rising to the level in August from a five-month low of 2.4% in July.

Payrolls are expected to post a second straight gain in August after being unchanged in July and rising in the previous five months. In August, the increase in overall employment was led by a jump in the healthcare and welfare category but there were sharp drops in manufacturing and wholesale/retail. In recent months, employment gains have been in both regular and non-regular positions (sharp gains in women and non-regular jobs) after the total number of employed unexpectedly posted its first year-on-year drop in 42 months in January for one-off factors.

The government continued to describe employment conditions as “showing signs of improvement” in its latest monthly economic report for September, unchanged since the last upgrade for the category in June 2023.

Friday, Oct. 30
0850 JST (2350 GMT/1950 EDT Thursday, Oct. 29) The Ministry of Economy, Trade and Industry releases preliminary September, Q3 industrial output, the outlook for October, November.
Mace News median: +1.2% m/m (range: +0.1% to +1.8%) vs. Aug revised down to -2.4% from -1.7%; +0.9% y/y (range: -0.2% to +1.5%) vs. Aug revised down to +2.7% from +3.4%

Japan’s industrial production is expected to post its first increase in three months in September, up a modest 1.2% on the month, after marking a surprise second straight drop in August (revised down to -2.4% from -1.7%). The forecast rebound is likely to be led by computers, autos and production machinery but severe rain storms that battered many regions in the month appear to have hurt some factory operations and restricted supply deliveries.

Production has shown some underlying strength backed by global demand for equipment to make memory chips for artificial intelligence projects and the recent pickup in the auto sector.

Last month, the monthly survey by the Ministry of Economy, Trade and Industry indicated that output would rebound 1.6% on the month in September (adjusted for the statistics’ upward bias) and rise a further 3.1% in October, led by production machinery, semiconductors and computers.

The ministry has maintained its assessment that industrial output was “taking one step forward and one step back.” The last change was made in the July 2024 report, when it upgraded its view.

From a year earlier, production is forecast to mark its fourth consecutive increase, up 0.9%, after rising a downwardly revised 2.7% in August.

Friday, Oct. 30
0850 JST (2350 GMT/1950 EDT Thursday, Oct. 29) The Ministry of Economy, Trade and Industry releases preliminary September retail sales.
Mace News median: +3.2% y/y (range: -0.1% to +4.7%) vs. Aug revised to +2.9% from +2.7%; +1.0% m/m (range: +0.1% to +4.7%) vs. Aug revised to -0.9% from -1.2%

Japanese retail sales are forecast to post their seventh straight year-on-year rise in September, up a solid 3.2%, as an early arrival of cooler weather propped up demand for autumn clothing and the longer-than-usual Silver Week holidays boosted spending by both domestic and overseas shoppers, alleviating the dampening effects of rain storms and elevated costs of living. The pace of increase has picked up to an upwardly revised 2.9% in August and 3.7% in July after slowing to 0.6% in June from 5.0% in May.

Government offices and banks were closed from Monday, Sept. 21 through Wednesday, Sept. 23 for the Silver Week public holidays but many retail stores remained open. It is a rare occasion for the Respect for the Aged Day (the third Monday of September) and the Autumnal Equinox Day (always Sept. 23) to line up nicely together, creating a five-day long weekend for people who don’t work on the weekends (Sept. 22 was a bridge holiday).

The increase in September sales is expected led by solid demand for clothing, foodstuffs and drugs/cosmetics. Auto sales have also recovered. Demand for appliances may have slowed after hot and humid weather lifted sales of air conditioners and other seasonal goods earlier. Sales of fuels remain depressed as their prices have been restrained by subsides aimed at easing the pain of high costs amid the lingering the Mideast conflict.

The Ministry of Economy, Trade and Industry is likely to maintain its assessment, saying retail sales are “taking one step forward and one step back.” The ministry downgraded its view in the August report for the first time since September 2025.

On the month, retail sales are forecast to rebound 1.0% after falling an upwardly revised 0.9% in August and rising 2.1% in July and slumping 3.9% in June, which was the first drop in four months. 

Industry data showed department store sales posted their ninth straight year-on-year rise in September, with the pace of increase accelerating to 4.2%, after stormy weather slowed it down to 2.6% in August from 5.1% in July. In addition to high sales of autumn clothing, persistent demand for brand name goods continued to support overall sales. The Japan Department Stores Associations noted that Sept. 18-23 holiday steak pushed up sales of all major categories.

Sales to visitors from overseas rose 25.3% on the year in September for seven months in a row and returning to the recent trend of double-digit percentage gains. The pace of increase slowed sharply to 4.6% in August from 25.5% rise in July. Tourists from South Korea, Taiwan and Hong Kong continued to lead the gain. Spending by shoppers from mainland China was up by about 7% after falling 17.5% in August and rising about 5% in July. The number of Chinese shoppers was still down 15% as many of them are bypassing Japan at the request of Beijing over bilateral diplomatic rows.

Friday, Oct. 30
c.1130 JST (c.0230 GMT Friday, Oct. 30/c.2230 EDT Thursday, Oct. 29) The Bank of Japan releases the outcome of its two-day policy board meeting in a monetary policy statement, the board’s medium-term growth, inflation outlook, risk analysis in its quarterly Outlook Report.

The nine-member board is widely expected to stand pat in a unanimous or majority vote after raising rates last month. It is likely to repeat the need to lift the policy rate further into a neutral zone and continued to warn against the risk of high energy costs spreading to a wide range of goods and services.

Friday, Oct. 30
1530-1630 JST (0630-0730 GMT/0230-0330 EDT Friday, Oct. 30) BOJ Governor Kazuo Ueda holds a news conference to discuss the board’s decision. Ueda is expected to stress that the focus of the BOJ board has shifted to preventing a second-round inflationary effect of supply shocks from triggering a spike in underlying inflation far above the bank’s 2% target.