Bank of Japan Holds Rates, Signals Confidence in Inflation Outlook
The Bank of Japan (BOJ) kept interest rates unchanged on Thursday, in line with market expectations, as policymakers balanced economic uncertainty with a looser fiscal stance under Japan’s new government.
The central bank reiterated that it will raise rates further if inflation and economic growth evolve according to forecasts, reaffirming its gradual approach to tightening monetary policy.
Growth and Inflation Outlook Adjusted
The BOJ slightly raised its forecasts for GDP growth and inflation in fiscal 2025, but trimmed its outlook for 2026, reflecting near-term resilience and medium-term headwinds.
Japan’s benchmark interest rate remains at 0.5%, unchanged since the last hike in January. Thursday’s decision passed with a 7–2 majority vote, with Takata Hajime and Tamura Naoki maintaining their calls for another 25 basis-point increase to 0.75%, arguing inflation risks warrant a move closer to the neutral rate.
The bank now expects 2025 GDP growth between 0.6% and 0.8%, up slightly from 0.5%–0.7%, describing the outlook as “modest” amid overseas headwinds and declining corporate profits. However, accommodative financial conditions are expected to provide support for growth.
Inflation Nears Target, Political Pressure Mounts
The BOJ projects consumer inflation (CPI) in 2025 at 2.7%–2.9%, slightly above its prior range of 2.7%–2.8%, while core inflation is expected to remain close to the 2% target through 2026.
For fiscal 2026, GDP growth is forecast at 0.6%–0.8%, down from 0.7%–0.9%, and CPI is seen in a range of 1.6%–2.0%.
Recent data showed a pickup in Japan’s consumer prices, with core inflation holding above the BOJ’s 2% target — a trend that may keep policymakers leaning toward gradual rate hikes in the coming months.
However, the BOJ faces potential political resistance to further tightening after the election of Prime Minister Sanae Takaichi, known for her fiscally dovish stance. Takaichi is expected to boost government spending and stimulus, advocating for looser monetary conditions to support what she calls a fragile Japanese economy.
Market Reaction
Following the decision, the Japanese yen weakened slightly, with the USD/JPY pair rising 0.2%. Japanese stocks held firm, with the Nikkei 225 up 0.4% and hitting a new record high, signaling continued investor optimism.
