Bank of Japan policymakers were divided over how quickly to lift interest rates toward a neutral level when they held the policy rate at 1.25% last month, a summary of the Oct. 29-30 meeting released on Tuesday showed, with one member saying the neutral rate is likely "considerably above 1 percent" and another warning that the bank may already be there.

The split matters for investors in Asia because the yen, Japanese government bond yields and carry trades funded in yen all hinge on whether the next move comes at the Dec. 17-18 meeting or later. The summary also said the core consumer price index, which excludes fresh food, is projected to rise above 3% toward the end of the fiscal year in March 2027, a forecast that gives the hawks more to work with.

The board voted 8-1 to keep the overnight call rate at around 1.25%, according to the Oct. 30 policy statement. Board member Hajime Takata dissented and proposed a rise to 1.5%. The summary does not name speakers, but one opinion repeats his argument almost word for word: that Japan has entered a new phase in which the bank must step up the pace of bringing rates to neutral.

How the Bank of Japan board views the neutral rate

The opinions fall into three camps. The first group backed the hold on caution. One member said a little more examination of risks and financial conditions was needed. Another pointed to "some weakness" in parts of the economy and said the bank should wait to assess the cumulative effect of past hikes.

A second group wanted to move sooner. One member said underlying inflation has already reached 2% and the bank needs to bring its rate to neutral soon, while monitoring conditions for a few months after each step. That member described the approach as making "haste slowly." Another said the bank should make a regime shift and reach neutral at an early stage, so it has room to cut or raise later depending on conditions at home and abroad. A third said the next hike should come when possible "without becoming overly cautious," while examining whether consumption can hold up given Japan's aging population.

The third view was the most dovish. One member said the policy rate has entered the estimated range of the neutral rate and that the degree of monetary accommodation is gradually shrinking, so the risk that a further hike weighs on the economy and pushes down underlying inflation deserves due attention. A different member argued that inflation can stay anchored around 2% even without rushing to neutral, as long as the bank keeps raising rates.

One opinion set out a case for why another hike would do limited harm: it might restrain business and housing investment somewhat, both of which face supply constraints, but would have a broadly neutral net effect on private consumption.

Inflation, wages and the Bank of Japan's December decision

On prices, members agreed that underlying inflation is generally consistent with the 2% target, but differed on the risks around it. One said that with headline CPI growth in the 2% to 3% range, inflation could overshoot. Another noted that inflation expectations in Japan are less firmly anchored than in Europe or the United States, which could make reactions to outside shocks more pronounced.

Wages remain the swing factor. One member cited companies saying they will raise pay next year by about as much as this year. Another said wage growth is unlikely to accelerate significantly in 2027 and that the risk of oil-driven price increases feeding into pay is not high. That member also flagged the need to watch how price declines caused by government policy measures will affect next spring's wage talks.

The board's own forecasts point the same way as the hawks. In the October Outlook Report, the median forecast of board members put core CPI inflation at 2.6% in fiscal 2027, and the bank said risks to prices are skewed to the upside.

On growth, the summary was cooler. One member said private consumption "lacks momentum," citing a decline in the Consumption Activity Index in July and August from the April to June quarter. Another said the boost from AI demand has flowed mainly through semiconductor materials, chip equipment and data centers, so its durability needs watching.

ETF sales and the government's view

Members also explained the decision, taken unanimously, to more than double the pace of the bank's ETF sales. The statement set the new pace at about 860 billion yen a year at book value from January 2027, up from about 330 billion yen, equal to about 0.1% of trading value in the market. One member said the bank should reassess the volume of sales that would cause the least disruption, while paying attention to the effect of central bank ETF holdings on corporate governance.

Government representatives from the Ministry of Finance and the Cabinet Office said the ETF proposal reflected the bank's experience so far and that they expected it to decide as appropriate. The Cabinet Office representative said the economy is "at a crossroads" on whether it can enter a virtuous cycle of growth. Both said they expected the bank to cooperate closely with the government. For background on how the board weighed faster hikes earlier this autumn, see the minutes of the September meeting.

The board's next policy meeting is Dec. 17-18. Takata, the lone dissenter in October, would need four more votes for the 1.5% rate he proposed.