Japan's government and BOJ diverge on inflation ahead of rate meeting

what happened

Japan's Economy Minister Minoru Kiuchi said the country has not yet met the conditions for officially declaring victory over deflation. He said the government wants to examine consumer prices, the GDP deflator and the factors driving underlying inflation before reaching such a conclusion. This runs counter to the Bank of Japan's view that underlying inflation may already have reached its 2% target.

The core consumer price index rose 2.1% in September from a year earlier. Analysts say the government is wary that abandoning the deflation narrative would reduce its room for accommodative fiscal and monetary policy. Kiuchi, a known advocate of loose monetary policy, has repeatedly voiced reservations about the BOJ's rate-hike plans.

The BOJ meets next week and is expected to keep rates steady while raising its inflation forecast. Reuters reported the details.

why it matters

For markets, the key point is the BOJ's signal that it remains determined to keep raising borrowing costs as prices rise. The public split with the government adds uncertainty about future policy and could influence the yen and Japanese government bond yields.

market impact

Yen and JGBs: the policy rift adds uncertainty ahead of the BOJ decision

tags

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