The development represents a milestone in Japan's prolonged efforts to overcome years of weak price growth and establish sustainable inflation, supported by stronger wage increases and changing corporate pricing behaviour.
Despite the improved inflation outlook, the central bank maintained its benchmark interest rate at 1.25 per cent, its highest level since 1995, in a decision widely anticipated by financial markets.
The decision was reached by an 8-1 vote, with board member Hajime Takata dissenting and calling for an increase in the policy rate to 1.5 per cent.
Before Thursday's announcement, the BOJ had consistently described underlying inflation as being "approaching 2 percent." Its latest assessment that inflation was now "generally consistent" with the target signals growing confidence that price increases are becoming more firmly established in the Japanese economy.
The central bank also raised its inflation projections for fiscal year 2027, forecasting headline inflation at 2.6 per cent, up from its previous estimate of 2.4 per cent.
Its so-called core-core inflation forecast, which excludes fresh food and energy prices, was also revised upwards to 2.7 per cent from 2.6 per cent.
The BOJ warned that inflation could exceed its 2 per cent target, pointing to changing corporate behaviour and the possibility of further price increases.
It said "firms' behavior has been shifting more toward raising wages and prices and there are various factors that could drive up prices."
Further Rate Increases Expected
Market analysts described the decision to maintain interest rates while strengthening the central bank's inflation assessment as a "hawkish hold", suggesting that further monetary tightening remains likely.
Krishna Bhimavarapu, APAC economist at State Street Investment Management, said the BOJ appeared increasingly confident that Japan was moving towards a sustainable inflation environment driven by stronger wages, consumption and corporate pricing decisions.
According to him, the central bank's position reflects growing confidence in a "self-sustaining wage-price-consumption cycle."
However, Bhimavarapu cautioned that the country's economic growth outlook did not justify rushing into another interest rate increase.
He expects Japan's gross domestic product growth in the third quarter to lose momentum, with household consumption remaining the weakest component of the economic recovery.
A CNBC survey of 16 economists conducted before the monetary policy announcement showed that all respondents expected the BOJ to prepare the ground for another interest rate increase in December or January.
The expectations reflect persistent domestic inflation and improving wage growth, which have strengthened the case for further adjustments to monetary policy.
Thirteen of the economists surveyed also projected that the BOJ's terminal interest rate, representing the level at which it is expected to conclude its tightening cycle, would reach between 1.75 per cent and 2 per cent by around the middle of 2027.
Weak Yen, Energy Costs Sustain Inflation Pressure
Japan continues to face inflationary pressures arising from a weakened yen and elevated energy prices, both of which have increased the cost of imports and placed additional pressure on households and businesses.
However, economists have cautioned that government energy subsidies introduced by the Takaichi administration have helped contain consumer price inflation, potentially masking some of the underlying cost pressures in the economy.
The latest inflation figures for September showed that core consumer prices rose by 2.1 per cent, their highest level in 2026 and above market expectations.
Wage growth has also emerged as an important factor in the country's changing inflation outlook.
Earlier this month, Finance Minister Satsuki Katayama reportedly told parliament that Japan was "on the cusp of shifting to a period of sustained inflation driven by rising wages."
Government data showed that inflation-adjusted wages increased for the eighth consecutive month in August, rising 1.5 per cent from a year earlier.
The continued improvement in real wages suggests that Japanese workers are beginning to experience stronger purchasing power, potentially supporting household consumption and reinforcing the cycle of wage and price increases.
For the BOJ, the challenge now is to ensure that inflation remains sustainable without undermining economic growth and household spending.
Although Thursday's decision to maintain interest rates indicates caution, the upward revision of inflation forecasts and the central bank's stronger assessment of its long-standing target suggest that Japan's monetary policy could remain on a gradual tightening path.