Even if there likely won't be another rate hike this month, the BOJ appears to be preparing to take another step towards further policy tightening.

The latest report from Reuters notes that the BOJ could signal in its October quarterly outlook that underlying inflation has roughly reached its 2% target, according to sources familiar with the central bank's thinking.

Now, that's quite significant from a symbolic sense. For a central bank that has spent years trying to generate sustainable inflation, that would mark a meaningful shift in the policy backdrop. And that underscores the readiness to raise interest rates again in the coming months.

In other words, the shift is not a guarantee that rate hikes will follow but it does reinforce market expectations of a move in December and perhaps is a suggestion that the BOJ could even step up the pace of its policy tightening.

The sources also point to steady wage gains alongside firmer consumer and wholesale inflation as reasons for the change in tone. They make mention that the recent Tokyo inflation data and the BOJ's Tankan survey have added to confidence that underlying inflation is now close to 2%.

That being said, the report suggests that there is little urgency to move again straight away after having raised interest rates in September already. The sources note that "many" in the central bank would prefer to take a more cautious step in October, wanting to gauge more data on how previous rate hikes are filtering through to the economy.

And markets appear to be thinking along the same lines. Traders are pricing around an 86% chance that the BOJ leaves rates unchanged in October, which looks reasonable after the central bank already moved in September.

The bigger question now is what happens after that.

Markets are currently assigning roughly a 64% chance of another rate hike by December, and any formal acknowledgement that underlying inflation has effectively reached the 2% target would help support that view.

And I would say more importantly, it would fit comfortably with the gradual pace of tightening seen so far. The BOJ has already raised rates in June and again in September, suggesting that policymakers are still trying to normalise policy without moving too aggressively - yet.

I would view this report as being one that treats the October meeting as another piece of groundwork for further tightening.

So if the BOJ is now more comfortable in saying that underlying inflation is around 2%, the debate will then slowly shift towards how quickly rates should rise from here rather than whether further normalisation is justified at all.

This article was written by Justin Low at investinglive.com.

Source: Investing Live - Central Bank