EL7.AI
Central BanksMedium•30 October 2026•
4 min read

Bank of Japan Holds Rate at 1.25%, Warns Inflation Could Exceed 2% Target

Key Facts

1The Bank of Japan held its short-term interest rate at 1.25% in an 8-to-1 vote on October 30, 2026.
2The bank raised its core inflation forecast for fiscal 2027 to 2.6% from 2.4% in its July 2026 forecast.
3The bank said core inflation had become generally consistent with its 2% price stability target.
4The yen rose to 157.89 against the dollar and was headed for a monthly gain of 0.11% in October.

The Bank of Japan kept its short-term interest rate at 1.25% in its decision on October 30, 2026, while saying core inflation had become "generally consistent" with its 2% price stability target. The decision passed with 8 members voting to hold and one dissenting, as Policy Board member Hajime Takata opposed it, according to Reuters. The bank's description refers to its assessment of a range of underlying inflation indicators; it does not mean measured inflation has stabilized at 2% or that the bank has declared its mission complete. The bank said it expects core inflation to remain near that level. In its report, it pointed to a shift in the monetary policy phase from pushing inflation toward the target to watching for the possibility of an overshoot. This assessment puts upside price risks at the forefront of the bank's calculations, despite leaving rates unchanged at the meeting.

The bank raised its median forecast for core inflation in fiscal 2027 to 2.6%, from 2.4% in its July 2026 forecast, based on the consumer price index excluding fresh food. Fiscal 2027 runs through March 2028, making the forecast relevant to a longer horizon than the current rate decision. The bank explained that its concept of core inflation is broader than a single reading, encompassing underlying inflation indicators, inflation expectations and trend inflation. It said many of these indicators are around 2%. By contrast, it expects headline inflation excluding fresh food to accelerate to a level clearly above 2% over the forecast horizon. It then expects it to decline toward 2% in the second half of that horizon, while continuing to monitor price trends.

The bank attributed some of the expected pressures to wage increases being passed through to prices, as well as higher oil prices, goods tied to AI-related demand and the weak yen. It warned that rising inflation expectations could push core inflation above the 2% target, saying the risks to the outlook were tilted to the upside. It added that developments in the Middle East, AI-related demand and the exchange rate warrant monitoring. It noted that the weak yen raises import prices and that the exchange rate's impact on prices has become stronger than in the past. It also said companies' shift toward raising wages and prices could amplify the effect of the currency's depreciation on prices. The issue the bank is therefore monitoring is how firmly these pressures feed through to core inflation, and the possibility that it could overshoot the target.

On economic activity, the bank said Japan's economy had recovered moderately and exports had increased moderately, supported by a strong rise in global demand related to AI. It expects the economy to continue growing moderately in fiscal 2026, but at a slower pace. It attributed the expected slowdown to pressure from higher energy and raw material prices, while pointing to support from AI-related demand, financial easing and government measures. It also said labor market conditions remain tight. The bank's assessment thus combines continued economic growth with pressure from energy and raw material costs. This backdrop remains part of its assessment of the path for prices and growth in its October report.

In markets, the yen rose to 157.89 against the dollar and was headed for a monthly gain of 0.11% in October, according to a Reuters report, amid a decline in U.S. Treasury yields. An analyst quoted by Reuters said markets had priced in the continuation of a quarterly rate-hike cycle and a terminal rate above 2%. On this assessment, pricing in those increases raises the bar for the hawkish surprise the bank would need to shift market expectations. EL7 data showed that holding at 1.25% matched both the market expectation and the previous rate, which were at the same level. The minutes of the October meeting are scheduled for release on November 10, 2026, according to the Bank of Japan's calendar. The bank will hold its next meeting on December 17 and 18, 2026, while the minutes will provide details of the October 29 and 30 meeting deliberations.