As policy pressures mount, the BOJ is expected to raise its inflation forecast

　　The Bank of Japan is expected to raise its inflation forecast this month, putting prices above its 2 per cent target for the second year in a row, according to three people familiar with the matter.

　　At its Oct. 31 policy meeting, the BOJ is expected to raise its forecast for core consumer inflation through next year to close to 3% from the current 2.5%. With the recent increase in the cost of oil expected to push up utility bills, the growth forecast for 2024 is expected to be raised to 2.0 percent or more from the current 1.9 percent.

　　The revision will intensify scrutiny of the boj's argument that it can maintain ultra-loose monetary policy because it is still some way from achieving its 2 per cent inflation target in a stable way.

　　It will also increase pressure on the Bank of Japan to remove the 1.0 per cent ceiling on 10-year government bond yields it imposed three months ago.

　　Naomi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities, said: "The BOJ is likely to raise its price forecast but wants to keep its easing policy framework unchanged for now. Instead, what it could do is raise the ceiling and interpret it as intended to make the framework more flexible. But doing so could put the boj's responsibilities at risk, as real rates would deviate too far from the 0 per cent target."

　　If investors begin to expect tighter policy, it could trigger sharp and disruptive swings in capital markets, complicating the task of moving away from ultra-low interest rates.

　　While Ueda assured markets that there would be no immediate change in policy, rising inflation and upward pressure on Japanese yields make it increasingly difficult for the BOJ to maintain its yield curve control (YCC) policy.

　　One source said: "Even if the inflation forecast is raised, it will not trigger a policy shift. What is more critical is whether there is a positive wage inflation spiral in Japan."

　　Many at the BOJ are wary of phasing out stimulus too soon, especially if the inflation overshoot is largely caused by one-off factors such as fuel. Their preferred course of action is to wait until Japan's economy is more certain it can withstand headwinds from slowing overseas demand and allow companies to keep raising wages next year and beyond.

　　Notably, Japan's (JPN) largest labor organization, Rengo, plans to call for a total wage increase of more than 5 percent, bolstering the prospects for solid wage growth next year.

　　But some analysts said global uncertainties such as weak economic growth in China (CHN) and the recent crisis in the Middle East could hurt business sentiment and deter companies from raising wages.

　　Market factors may not leave the Bank of Japan much time to sit on its hands...

　　Recent sticky inflation in Japan and the recent rise in US yields have been a concern, with the 10-year JGB yield hitting a multi-year high of 0.815% on Wednesday, close to the Bank of Japan's hard ceiling of 1.0% set in July.

　　One of the sources said: "When inflation starts to rise, the YCC becomes an untenable framework. It's hard to keep a lid on yields when rising yields reflect an improving economy."

　　In a Reuters poll in September, a majority of analysts said they expected the BOJ to abandon the YCC by the end of 2024. Most of them also expect an end to negative interest rates next year.