The Bank of Japan is widely expected to leave its policy rate at 1.25% when its two-day meeting ends Friday, but the quarterly forecasts it publishes with the decision may lean toward higher inflation and keep a December rate increase firmly on the table.

Four sources familiar with the central bank's thinking told Reuters that the board may slightly raise its core consumer inflation forecast for the fiscal year that starts in April 2027, as a renewed climb in crude oil prices keeps upward pressure on prices for longer than expected. Any revision is likely to be minor, the sources said.

Traders have all but ruled out a move this week. Market pricing implied roughly 73% odds of a hike in December, according to investingLive, and the outlet put the figure at about 74% after a parliamentary appearance by Deputy Governor Ryozo Himino a day later.

A Pause After Two Quick Hikes

The BOJ raised its benchmark to 1.25% on Sept. 18, the highest level since 1995, in a 7-2 vote. Board members Toichiro Asada and Ayano Sato voted against the move, according to Trading Economics. The increase came three months after a June hike, the shortest gap between moves since 1990, according to Tiger Brokers' news service and Trading Economics.

That pace has left many officials inclined to wait and assess the effects. One source summed up the mood to Reuters: “Inflation pressures exist but haven't jumped, so there's little reason to rush.”

Data since the September meeting have mostly supported patience. The Oct. 1 tankan survey showed companies' inflation expectations stayed elevated without accelerating from three months earlier, Reuters reported. Nationwide core consumer prices, which exclude fresh food, rose 2.1% in September from a year earlier, above the 2% target for the first time in nine months but in line with forecasts, Trading Economics said.

The main risk to a hold is the currency. The Reuters sources said a renewed slide in the yen, which would lift import costs, could change the calculus. The dollar bought about 157.7 yen on Tuesday, according to Trading Economics, compared with a July low for the yen of 163.99 per dollar, its weakest since 1986, as reported by the Qatar Tribune.

Officials Lay Groundwork for December

Senior policymakers have spent October building the case for further tightening. Governor Kazuo Ueda told a securities industry gathering in Tokyo on Oct. 6 that the bank intends to keep raising its policy rate. He also said it was “becoming increasingly important to stabilize the underlying inflation rate around 2%,” according to Tiger Brokers' news service.

Ueda has named three forces that could push underlying inflation above target: conflict in the Middle East, strong demand tied to artificial intelligence and the weak yen. On Oct. 19 he told parliament that raising rates at an appropriate pace would help prevent spikes in bond yields, according to Trading Economics.

Himino went further on Oct. 21. He told lawmakers that underlying inflation was quite close to the target and that financial conditions remained accommodative even after September's move, pointing to low real borrowing costs and strong bank lending growth, Reuters reported. He cautioned that waiting too long to scale back monetary support could let inflation risks build and damage the economy in the long run.

Board member Junko Koeda argued on Oct. 15 that the bank should not be overly cautious about further increases, according to Trading Economics.

What to Watch on Friday

Beyond the decision itself, investors will study the quarterly outlook report. In July, the BOJ projected core inflation of 2.5% for the fiscal year ending March 2027, easing to 2.4% the following year. Its current growth projections are 0.6% for fiscal 2026 and 0.8% for fiscal 2027, figures the Reuters sources expect to stay roughly unchanged as AI-related exports offset weak consumer spending.

The July report also estimated that underlying inflation would reach levels consistent with 2% sometime in a window ending in March 2028, Reuters reported. Three sources told Reuters earlier this month that the October report may signal that point has roughly been reached, a largely symbolic step that would reinforce expectations for December.

The new forecasts are unlikely to include the government's planned two-year cut in the consumption tax on food from April, because the bill has not yet passed parliament, Reuters reported.

Many analysts polled by Reuters expect two more hikes, taking the policy rate to 1.75% by June 2027, with estimates for the eventual peak centered between 1.75% and 2%. The U.S. Federal Reserve concludes its own two-day meeting on Oct. 28, the day before the BOJ begins deliberations, according to FXStreet. Ueda's news conference after Friday's decision will be watched for any hint on timing ahead of the next meeting on Dec. 17-18.