Bank of Japan Holds Rate at 1.25% as Inflation Risks Tilt to the Upside
Key Facts
The Bank of Japan kept its overnight interest rate at around 1.25% at its Oct. 29-30 meeting, but signaled that price risks were tilted to the upside, keeping the monetary policy path tied to inflation developments and incoming data. At the same meeting, board member Takata proposed raising the rate to around 1.5%, but the proposal was rejected by a majority vote, according to the bank’s decision. The 1.5% level is therefore neither a bank decision nor a signal that a December hike is settled. Governor Kazuo Ueda said the pace of future increases would depend largely on incoming data. He added: "We cannot decide in advance how many months we will spend each time before raising interest rates." The bank is scheduled to hold its next meeting on Dec. 17-18.
The bank’s forecasts published in October show that it raised its median forecast for consumer price inflation excluding fresh food in fiscal 2027 to 2.0%, from 1.8% in its July outlook. The bank sees this measure accelerating to a level clearly above 2% in the first half of the projection period, before easing toward the target in the second half. The bank said risks to its price outlook were tilted to the upside, while risks to economic activity were broadly balanced. It also pointed to the possibility that medium- and long-term inflation expectations could rise and that underlying inflation could move further above the 2% price stability target. This comes as corporate behavior shifts toward raising wages and prices, which could strengthen the pass-through of cost pressures to prices paid by consumers.
The bank identified several factors behind the upside risks, including companies passing wage increases on to selling prices and higher oil prices. It also said global demand related to artificial intelligence, a weaker yen and higher prices for semiconductors and other products could push prices higher. In its fiscal 2026 forecasts, the bank put underlying inflation at 2.5%, with real gross domestic product growth at 0.7%. For fiscal 2027, it expects median real growth of 0.7%, little changed from its July outlook. These estimates show diverging paths for prices and activity in the bank’s projections: inflation above target in the near term, against expected economic growth at a similar level in the two fiscal years.
The Bank of Japan raised its benchmark interest rate in September from 1.0% to 1.25%, its highest level in 31 years, according to the Associated Press. In a speech on Oct. 15, board member Junko Koeda said the estimated nominal neutral interest rate range was around 1.1% to 2.5%, after adding the 2% inflation target to the estimate of the real natural interest rate. Koeda urged the bank to adjust rates in a timely manner while taking economic and price conditions and the estimated neutral rate range into account. She warned against excessive caution over rate hikes, citing significant upside risks to prices and continued accommodative financial conditions. The range alone does not determine the timing of the next move, as Ueda said rate-hike decisions would remain dependent on data.
Alongside its rate decisions, the bank decided to accelerate its sales of exchange-traded funds to around 860 billion yen a year on a book-value basis, compared with around 330 billion yen previously. The new pace will take effect in January 2027. The move is part of the bank’s path to reduce its asset holdings, as it continues to monitor the impact of price and economic activity conditions on its monetary policy decisions. The minutes of the September meeting are due on Nov. 5, while a summary of opinions from the October meeting will be released on Nov. 10. The minutes of the October meeting will be released on Dec. 23, after the monetary policy meeting scheduled for Dec. 17-18.