BOJ May Pivot to Aggressive Inflation Fight as Early as December
Claire Weston
Former BOJ official Tsutomu Watanabe expects the Bank of Japan to shift from tolerating inflation to actively fighting it as early as December, accelerating rate hikes from twice a year to once per quarter — a signal that Japan's exit from the zero-rate era is speeding up.
Why might the BOJ need to shift gears?
Japan is now facing a third wave of inflation: the first from the Ukraine war, the second from domestic wage and rice-price gains, and the third from renewed price pressure tied to the Middle East conflict.
Watanabe expects core CPI — prices excluding fresh food and energy, a cleaner read on "real" inflation — to peak near 3% around March next year.
This means → three stacked waves have turned inflation from a "wait-and-see" problem into a persistent one the BOJ can no longer sit out.
Why is "underlying inflation" the real trouble?
Watanabe's chief concern is not headline CPI but underlying inflation — the long-run price trend after stripping out short-term swings. He says it is "already very close to 2%."
If the BOJ keeps its current slow hiking pace, underlying inflation could overshoot to 2.2% by around July next year.
In plain terms = surface inflation can cool on its own when oil prices drop, but once underlying inflation overshoots, the only fix is aggressive rate hikes — exactly the scenario the BOJ wants to avoid.
What would trigger the policy pivot?
The key variable is next spring's wage negotiations — Japan's annual round of collective bargaining known as "Shunto." If results show wage gains roughly matching recent strong increases, the BOJ could switch modes as early as December.
Middle East uncertainty may push some companies to delay pay decisions, the main risk to the pivot timeline.
This means → the Shunto outcome is both the BOJ's starting gun and its shield — until the data arrives, the bank has cover to keep waiting.
How fast would rates rise after the pivot?
Watanabe expects the hiking pace to jump from roughly twice a year to once per quarter.
The BOJ's policy rate currently sits at 1%, yet real borrowing costs remain negative after accounting for inflation. In plain terms = the bank is nominally tightening, but borrowers are still effectively being paid to borrow.
This reflects the BOJ's dilemma: hike too slowly and inflation runs away; hike too fast and markets could seize up.
What is the BOJ's biggest weakness?
Watanabe warns that the BOJ has spent decades fighting deflation and has almost no hands-on experience suppressing inflation.
Markets are already questioning whether the BOJ "truly has the resolve and ability to keep inflation around 2%." This means → raising rates alone is not enough — the bank must rebuild credibility through unmistakable signals.
Watanabe's summary is blunt: "The BOJ succeeded in de-anchoring inflation from zero. But the challenge of re-anchoring it at 2% has only just begun."
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