Bank of Japan holds rates at 1.25%, raises inflation forecast to 2.6%
Key Facts
The Bank of Japan kept its short-term interest rate at 1.25% in a decision approved by 8 votes to 1, with board member Hajime Takata calling for an increase to 1.5%. In its accompanying outlook report, the bank raised its median forecast for core inflation in fiscal 2027 to 2.6% from 2.4% in its July projections. That fiscal year ends in March 2028, defining the period covered by the new estimate. Governor Kazuo Ueda said the bank would discuss interest rates at every meeting, including its December meeting, without committing in advance to a set pace of increases. The decision to hold rates comes as the bank sees inflation outlook risks tilted to the upside, while keeping the timing of any move dependent on its assessment of data and risks at each meeting.
The bank expects consumer price inflation excluding fresh food to accelerate to a level clearly above 2% before easing toward 2% in the second half of the projection period. It attributed price pressures to oil, chips and a weaker yen, as well as the continued pass-through of wage increases to prices. The bank said the interaction between wages and prices was working, and that medium- and long-term inflation expectations were around 2%. On that basis, it described risks to the consumer price index outlook as tilted to the upside. This places the 2.6% estimate for the fiscal year ending in March 2028 within a trajectory in which the bank expects a temporary rise above 2%, followed by a gradual return toward that level.
In its activity projections, the bank put real gross domestic product growth at 0.7% for fiscal 2026, 0.7% for fiscal 2027 and 0.8% for fiscal 2028. Its July forecasts were 0.6%, 0.8% and 0.8%, respectively, meaning it raised its estimate for 2026, lowered its estimate for 2027 and left its 2028 estimate unchanged. The bank said higher energy and raw material prices since early spring, linked to developments in the Middle East, were expected to weigh on corporate profits and household real income in fiscal 2026. Government measures, accommodative financial conditions and global demand related to AI are expected to support activity. The projections therefore combine pressure on purchasing power and profits with factors supporting activity.
Alongside its rate decision, the bank decided to accelerate the pace of exchange-traded fund sales to about 860 billion yen a year starting in January, compared with about 330 billion yen currently. The decision represents a sharp increase in the pace of reducing these holdings as part of its monetary policy normalization path. In the foreign exchange market, the dollar/yen rate rose from a close of 156.806 on October 23 to 157.378 on October 30. A Reuters report on the decision also said the yen reached 157.89 per dollar during the session and was on track for a monthly gain of 0.11% in October. These figures put the currency's performance over the period in the context of a decision to leave rates unchanged, despite Takata's objection to the rate level.
Most economists polled by Reuters expected the bank to raise its rate to 1.5% in December, with their estimates for the terminal rate concentrated between 1.75% and 2%. Kazutaka Maeda, an economist at Meiji Yasuda Research Institute, said the bank could move from the previously assumed six-month interval between increases to hikes every three months, making the December meeting a potential opportunity to act. These remain analysts' estimates, while Ueda said the bank would discuss rates at every meeting without setting a pace in advance. The bank's next meeting is scheduled for December 17 and 18, 2026, while it will publish a summary of opinions from its October meeting on November 10, 2026. The summary of opinions and the December meeting are the next two milestones for tracking the bank's assessment of the path for prices and interest rates.