BOJ's Ueda flags upside inflation risks weeks before December meeting

Ueda keeps December in play

Speaking at an International Monetary Fund seminar in Washington, Ueda said energy-related prices were beginning to feed into consumer inflation. He said price growth would accelerate further into early next year. He projected inflation would return to 2% in 2027 or 2028 if calm returns to the Middle East. The BOJ concluded at its 30 October meeting that underlying inflation had "generally" reached 2%. That was nearly 14 years after the government and the bank set that target in 2013. Ueda said the milestone means the bank must now keep inflation there "for years to come through appropriate adjustment of monetary policy".

He also said 2% inflation "hasn't quite become a social norm yet" in Japan. The bank's stated goal is to anchor underlying inflation around that level.

Why the December meeting matters

The BOJ raised its policy rate to around 1.25% in September, its second increase in three months. More than 80% of economists in a Bloomberg survey expect another hike at the 18 December meeting. The median forecast in that survey puts the terminal rate for this cycle at 1.75%. That implies two more quarter-point increases. BNP Paribas and J.P. Morgan Securities are among those forecasting the benchmark rate will reach 2.5%. The BOJ estimates the neutral rate lies somewhere between 1.1% and 2.5%. It stresses that it is difficult to pinpoint. After leaving rates unchanged last week, Ueda said underlying inflation had reached a level broadly consistent with the 2% target. He stressed the importance of labour and management factoring 2% inflation into pay negotiations.

Inflation excluding fresh food has exceeded the target for four straight fiscal years through March 2026. On the bank's latest forecasts, it will do so for six.

Wages give the BOJ cover

Nominal wages rose 4.6% in September from a year earlier, the largest gain since 1997, the Labour Ministry reported on 6 November. Base pay increased 3.7%. A more stable gauge excluding bonuses, overtime and sampling distortions rose by a record 3.1% for full-time workers. Real cash earnings, after adjusting for inflation and excluding rents, climbed 2.2% from a year earlier. That accelerated from a revised 1.6% gain in August and beat the consensus estimate of 1.3%. Economists had expected growth to slow owing to fewer working days.

In October, the largest labour union federation urged its members to demand wage increases of around 6% for 2027. That target is more ambitious than in 2026. The group's workers have secured raises exceeding 5% for three consecutive years.

Yasunari Tanaka is a researcher at Mitsubishi Research Institute. "I expect wage increases in next year's wage negotiations to come in at around 5%, roughly the same pace as in 2026," he said.

The 2% milestone and the doubters

Shinichiro Kobayashi, principal economist at Mitsubishi UFJ Research and Consulting, said the BOJ may have been slow to recognize that underlying inflation had reached, or even exceeded, the target. Kobayashi said the greatest significance of reaching 2 percent is that there is no longer a need to maintain an accommodative monetary environment. BOJ data show that Japan's wholesale prices have stayed around or above 7 percent since May. That may push consumer prices up sharply in the coming months. Ueda has warned against elevated wholesale prices. Yuichi Kodama, chief economist at Meiji Yasuda Research Institute, argued that taking more than 10 years to achieve the target suggests that monetary policy had little to do with it. Kodama said it is the BOJ's responsibility to anchor underlying inflation around 2 percent over the longer term. Services producer inflation was 3.7% in September, up from August's revised 3.5%. The measure excluding international transport held at 2.9%.

The BOJ's own language is careful. It said underlying inflation has "generally" reached 2%, not that it has settled there.

What happens next

The next policy meeting is on 18 December. Ueda left the door open to a hike then. He said the central bank must remain vigilant against inflation overshooting the target, possibly at its next policy meeting in December. The annual wage negotiations that supply much of the bank's evidence culminate in March. Ueda said the aim is to keep inflation at 2% "for years to come".