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BoJ shifts focus from hitting 2% inflation to avoiding overshoots
BoJ officials discussed the possibility of faster future hikes if conditions justify them, while warning that waiting could force later rapid, substantial tightening if inflation runs above target.
The Bank of Japan is showing a shift in how it frames inflation policy, according to Action Forex, as its July 30 to 31 Summary of Opinions moves from lifting underlying inflation toward 2% to preventing further upside deviation from target.
In one view cited by Action Forex, the focus of monetary policy changed from “lifting underlying CPI inflation to 2 percent” to “avoiding further upward deviation in underlying CPI inflation,” signaling a more sensitive reaction function to upside inflation risk. The July debate also weighed transmission lags, with one member estimating rate hikes take roughly one to one and a half years to affect inflation and economic activity, arguing BoJ should assess the impact of previous increases first.
At the same time, several opinions said underlying CPI inflation is approaching, or becoming anchored around, 2% while financial conditions remain accommodative, which some members used to argue for continuing to raise the policy rate and reduce monetary accommodation as warranted. Discussion also turned more hawkish on timing, including views that tightening could proceed faster than market expectations if activity, prices, and financial conditions support it.
Action Forex also notes more forceful warnings that waiting can carry its own risk. Members cautioned that if inflation overshoots, BoJ could later face the need for “rapid and substantial” hikes, described as a “double shock” for the economy and households, alongside attention to foreign exchange moves, medium to long term inflation expectations, and regional developments that include Middle East developments and AI-related demand.