Japan has its 2%

2026-11-07

For thirty years the question about Japan was whether inflation would ever arrive. At its October meeting the Bank of Japan answered it. For the first time, the board said underlying inflation is broadly in line with its 2% target, and every member signed up to that view, including two who had voted against the last hike.

It left the policy rate at 1.25%. One member wanted to raise it.

What changed, and what did not

The judgement on inflation. The Bank still says it cannot yet call the target "sustainable and stable". It also says it will not wait for that proof before acting. Prices are running ahead of it, and it sees the near-term risk as higher inflation, not lower.
The view on money. Financial conditions are still described as accommodative. Read plainly, 1.25% is not yet a neutral rate, and the Bank thinks it has room to close the gap.
The signal on timing. Governor Ueda said a decision will be taken "at every meeting, including the next one". The Bank has used that phrase before when it meant to move. We read December as live.
The ETF book. Sales of the Bank's equity ETF holdings will run at ¥860 billion a year from January 2027, up from ¥330 billion. At the new pace the book still takes around four decades to clear. It is housekeeping, not a market event.

Our read

The hikes from here are about taking away support, not about tightening. That matters for how fast they come. A central bank that thinks it is still easing will move roughly once a quarter for as long as wages and prices let it, and it will not need a crisis to do so.

For anyone holding or buying in Japan, three things follow.

The cost of money is moving up from a low base. Leverage that was free on yen terms is now a line item. Deals underwritten at last year's borrowing costs need a second look.
The discount narrows slowly. Japan has always traded at a discount, and part of that was a currency that only went one way. A central bank that is finally willing to normalise takes some of that out. It does not happen in a quarter.
Domestic businesses with pricing power are the winners. Companies that can pass on cost, and have shown it for two years, are worth more in a world where 2% is normal. Those that cannot will find that the cheap financing that carried them is going.

We live and work in Japan. Our working assumption for 2027 is a policy rate that keeps rising in small steps, and a yen that stops being a one-way trade.