The Bank of Japan is weighing whether to signal that underlying inflation has sustainably reached its long-held 2% goal, a move that could mark a pivotal shift in Japanese monetary policy after decades of deflation and ultra-loose stimulus.
The Bank of Japan may be preparing to formally acknowledge that underlying price pressures in the country have reached its 2% inflation target, according to people familiar with the matter. Such a signal would represent a significant milestone for one of the world’s most cautious central banks, which has spent years trying to escape a deflationary trap that kept prices — and growth — persistently weak.
For the BOJ, “underlying inflation” refers to a broader measure of price trends that strips out short-term swings caused by things like energy prices. Reaching and sustaining 2% on this measure has long been the central bank’s key condition for normalizing policy — that is, moving away from decades of near-zero or negative interest rates and massive bond-buying programs.
If the BOJ does make such a declaration, it would strengthen the case for further interest rate increases. Japan’s central bank has already taken small steps toward normalization in recent months, carefully unwinding some of its stimulus after years in which it was an outlier among major economies. Markets and analysts have been watching closely for any signal that the pace of that shift might quicken.
A formal acknowledgment of 2% underlying inflation would also carry weight in currency markets. The Japanese yen has been sensitive to any shift in BOJ tone, and a more hawkish signal could put upward pressure on the currency, with ripple effects for Japanese exporters and global investors who have used low Japanese rates to fund trades elsewhere — a strategy known as the carry trade.
The BOJ has moved deliberately through this process, wary of declaring victory too soon. Japan spent much of the 1990s and 2000s mired in deflation, and policymakers have been determined not to repeat past mistakes of tightening too early before price gains were firmly entrenched in the economy.
Any official signal is likely to be carefully worded, and markets will parse it closely for clues about the timing and size of future rate moves.
Watch for the BOJ’s next policy meeting statement and press conference for any formal language shift around the inflation target.
