[Edaily Reporter KIM JUNG YOU ] The Bank of Japan (BOJ) has decided to keep its benchmark interest rate at its current level. It also officially stated for the first time that the core inflation rate has reached its 2% target. Consequently, speculation is mounting that an additional interest rate hike will be implemented this coming December.

The BOJ held a Monetary Policy Meeting on the 30th and decided to keep the short-term policy rate (unsecured call rate) frozen at around 1.25% per annum. The unsecured call rate is the interest rate applied when financial institutions borrow and repay funds overnight without collateral, and it serves as Japan’s benchmark interest rate.

This decision was made with eight of the nine policy board members voting in favor and one voting against. BOJ Governor Kazuo Ueda, along with Deputy Governors Ryōzō Himino and Shin’ichi Uchida, and board members Naoki Tamura, Junko Koeda, Kazuyuki Masu, Dōichirō Asada, and Ayano Sato voted in favor of keeping the rate unchanged.

In its quarterly economic and inflation outlook report released the same day, the BOJ assessed that the underlying inflation rate is already broadly in line with its price stability target of 2%. This marks the first time this has been the case since the inflation target was introduced in January 2013.

The only member to vote against the decision was Hajime Takata. Takata believed that the underlying consumer price inflation rate had already reached the BOJ’s price stability target. Consequently, he argued that the policy interest rate should be raised more rapidly toward the “neutral rate.” The neutral rate refers to an appropriate interest rate level that neither overheats nor contracts the economy.

Furthermore, Takata argued that raising interest rates in advance would allow the bank to respond more nimbly to future changes in economic conditions, and proposed raising the benchmark rate by 0.25 percentage points to around 1.5% per annum; however, the proposal was ultimately rejected.

Bloomberg noted, “The key point of this announcement is that the BOJ has formalized the achievement of its inflation target and shifted the fundamental focus of its monetary policy.” This signifies that the BOJ has entered a phase of managing inflation to prevent it from exceeding the target and causing the economy to overheat. The BOJ emphasized, “We must be vigilant against the risk of underlying inflation deviating upward,” adding, “It is extremely important to maintain inflation stably near current levels going forward.”

As the threat of upward inflationary pressure comes into sharper focus, the view that the BOJ will raise interest rates further is gaining traction in the market. Junya Takemoto, a senior economist at Sumitomo Mitsui Banking Corporation (SMBC), told Bloomberg, “With expectations for a rate hike in December already heavily priced in, the key question is whether Governor Ueda will further reinforce those expectations during this afternoon’s press conference or maintain a neutral stance,” He noted, “In the past, Governor Ueda has often signaled that he would carefully monitor developments until the next meeting.”

Meanwhile, the BOJ has decided to increase the pace of its ETF sales by 2.8 times compared to the previous rate. The BOJ had previously purchased large quantities of ETFs in the stock market to prop up the economy. Previously, at its September meeting last year, the BOJ decided to sell its ETF holdings at a book value of approximately 330 billion yen annually (about 2.8 trillion won, or 0.05% of market turnover); this time, it has expanded that amount to 860 billion yen (about 7.3 trillion won, or 0.1% of market turnover).

Converted to market value, this amount amounts to approximately 2.46 trillion yen annually. Book value is based on the price at which the BOJ purchased the ETFs, while market value is calculated using current prices. As stock prices have risen recently, a significant gap has emerged between these two figures.

The new sale pace will take effect starting in January of next year. The BOJ also maintained its existing principle that it may temporarily adjust or suspend sales within the annual sale range if financial market conditions change rapidly. The sale pace for Japanese real estate investment trusts (J-REITs) remains unchanged at approximately 5 billion yen annually based on book value.