Japan's Underlying Inflation Finally Reached the BOJ's 2% Target
Japan's underlying inflation has reached the 2 percent target the BOJ set 13 years ago. The harder part now is anchoring prices while unwinding a balance sheet that still takes decades to clear.
The Bank of Japan held its uncollateralized overnight call rate at around 1.25 percent on October 30, 2026, in an 8-1 vote, and judged that underlying inflation has reached the 2 percent target adopted in January 2013. The same meeting more than doubled the pace of ETF sales. Hitting the target is the start of a harder phase, not the end of one: the bank is now guarding against an overshoot while it pulls a large stock of ETFs off its balance sheet.
According to the policy statement, hawkish board member Hajime Takata dissented and proposed a hike to around 1.5 percent. His proposal was defeated. In a unanimous vote, the board raised ETF sales from about 330 billion yen per year to about 860 billion yen per year on a book-value basis, starting in January 2027. On a market-value basis, that is roughly 2,460 billion yen. J-REIT sales stay at about 5 billion yen per year.
The October Outlook report states that underlying CPI inflation "is at a level that is generally consistent with the price stability target of 2 percent, and is expected to remain at around that level." That is the first time underlying inflation has reached the target since the 2 percent goal was set in January 2013, more than 13 years ago.
A 2.6 percent path, with risks still to the upside
The Outlook raised the median forecast for CPI, all items less fresh food, in fiscal 2027 to 2.6 percent, from 2.4 percent in July. The fiscal 2028 median is 2.0 percent. The bank said risks to the CPI outlook are "skewed to the upside" and that it "will continue to raise the policy interest rate." The 2027 median sits 0.6 percentage point above the target, and the 2028 median sits on it.
Governor Kazuo Ueda said underlying inflation "has reached levels consistent with our price target." He cautioned that the achievement is not yet sustainable, and that the bank must be "vigilant to the risk of inflation overshooting" the target. The 2 percent reading is in the Outlook report, but the governor is not treating it as locked in. He has put overshoot on the watch list rather than a shortfall.
That is why a hold at 1.25 percent and a dissent for 1.5 percent can come in the same vote. Most analysts polled by Reuters expect a hike to 1.5 percent in December, with a terminal-rate projection of roughly 1.75 percent to 2 percent. The Outlook already says the bank will continue to raise the policy rate, so the live question is timing, not direction. Takata's vote is the version of that view from inside the board.
ETF sales jump, and the unwind still runs for decades
Sales rise from about 330 billion yen per year to about 860 billion yen per year on a book-value basis. At the old pace, the full ETF unwind would have taken about 112 years. The new pace cuts that to about 43 years, on Asahi's calculation. Even 43 years is a long job. The bank is speeding up, not finishing.
The faster sales were characterized as a surprise. The Nikkei 225 pared losses to trade roughly 2 percent lower in the afternoon of October 30, amid a global tech selloff. Investors signaled confidence the market can absorb the extra ETF supply. J-REIT sales were left at about 5 billion yen per year, so the change is concentrated in ETFs, and the new pace begins in January 2027.
The harder phase is the one that starts here: keeping inflation near 2 percent without letting it run, and unwinding a balance sheet that, even at the new pace, still takes decades to come down.
