BoJ preview: hold at 1.25% expected, with 2% inflation call and dissent risk in focus

The yen and short-end Japanese government bond yields are where the reaction will show. A clear 2% declaration, a firm Ueda and a hawkish dissent would likely support the yen, push two-year yields higher and add to December pricing. Dovish dissents calling for a cut could outweigh hawkish language and trigger renewed yen selling, a risk sharpened by the yen’s heavy losses earlier this year. Oil remains a key swing factor: further gains in crude, tied to the conflict in the Middle East, strengthen the case for faster tightening because energy feeds directly into Japan’s import costs and inflation outlook. USD/JPY is also still digesting this week’s Federal Reserve meeting.---Earlier:BOJ preview: Daiwa sees hold, but 2% inflation call could open door to December hikeBoJ preview: MUFG sees hold but a 2% inflation call, with two dissenters the key yen riskBOJ to hold at 1.25%, but Ueda signals further hikes toward neutralBOJ seen lifting rates to 1.50% in December as 69% of economists expect a Q4 hikeBOJ reportedly may upgrade inflation forecast, hold rates steady at next week's meeting--- The Bank of Japan looks set to stand still this week, but a formal nod to 2% inflation and a split board could do the moving for it.Summary:The BoJ is widely expected to hold its policy rate at 1.25%; a hike this week is seen as very unlikelyAnalysts expect the Outlook Report to effectively declare that underlying inflation has reached 2%, with inflation and growth forecasts nudged higher on oilMarkets price roughly a 73% chance of a December hike; 69% of economists in a Reuters poll expect 1.50% this quarterDissent risk runs both ways: two members who opposed September’s hike could call for a cut, while Takata may push for a hikeUeda’s press conference language, especially any move toward “next meeting” phrasing, is a key December signalEasing inflation expectations argue for patience, while oil, cost pass-through and yen weakness argue for further tighteningThe Bank of Japan is widely expected to keep its policy rate at 1.25% when it concludes its two-day meeting on Friday. Markets are focused less on the decision than on whether the board signals a hike in December.A move this week would be a major surprise. The central bank raised rates in June and again in September, taking its benchmark to the highest level in 31 years, and traders were pricing virtually no chance of back-to-back tightening heading into the meeting. A Nikkei report citing a senior official said consecutive hikes would only be considered in a serious emergency. Market pricing pointed to roughly a 73% chance of a further increase in December. A Reuters poll of 78 economists found 69% expect the rate to reach 1.50% this quarter, with most of those naming December.The main event is likely to be the quarterly Outlook Report. Analysts broadly expect the board to effectively declare that underlying inflation has reached its 2% price stability target. That shift would move policy from lifting inflation toward keeping it stable. Governor Kazuo Ueda said earlier this month that, with underlying inflation close to 2%, the bank could not tolerate a further rise. A Reuters report citing sources familiar with the central bank’s thinking said policymakers may also nudge up their fiscal 2027 inflation forecast as higher oil prices feed through to consumer prices. Analysts at one Japanese brokerage expect upgrades to the growth and core inflation projections, driven mainly by crude.The vote could be as important as the statement. Two board members opposed the September hike, and MUFG flagged the risk that they dissent against a hold and call for a cut. That would reinforce a dovish image and could trigger yen selling. Other analysts expect board member Hajime Takata to dissent in the opposite direction, proposing a hike as he did in July.Ueda’s press conference will be watched for any change in language. If he moves away from saying rates are decided at every meeting toward phrasing that points to the next meeting, markets would likely read it as a strong December signal. A more guarded tone, focused on reviewing financial conditions after the September increase, could trim hike expectations.There are reasons for caution. October surveys showed household and business inflation expectations easing, and sources told Reuters there is little evidence of a broader wage-price spiral. ING expects a hold now, followed by two hikes in 2027. Against that, several forces keep pressure on the central bank to continue tightening: oil-driven price pressure linked to the conflict in the Middle East, broadening cost pass-through to consumers and the risk of renewed yen weakness.With the policy rate already inside the bank’s estimated neutral range of about 1% to 2.5%, the debate is shifting from whether the BoJ hikes again to how far it goes. Economists in the Reuters poll increasingly see a terminal rate of 2% or higher. Bank of Japan Governor Ueda news conference due at 0630 GMT.  This article was written by Eamonn Sheridan at investinglive.com.