BoJ recap: Policy stays on hold for now, but Japan has entered a new phase of inflation

At 1.25%, the Bank of Japan’s short-term policy rate was left on hold, accompanied by a notably hawkish warning about the risk of inflation overshooting its target. Board member Takata favoured a rise to 1.5%, dissenting from the 8-1 decision. Governor Kazuo Ueda, meanwhile, emphasised that the Bank would make further policy adjustments as required.

Underlying inflation was now broadly in line with the 2% price-stability target, according to the BoJ, although financial conditions were still accommodative and short-term real rates remained low. The Bank lifted its core CPI forecast for fiscal 2027 from 2.4% to 2.6%, leaving its fiscal 2028 projection unchanged at 2.0%. Its revised GDP growth forecasts stood at 0.7% for fiscal 2026 and 0.7% for fiscal 2027.

Where policymakers had previously focused on the danger of inflation falling short of the target, they now needed to guard against an overshoot, the central bank said, signalling a change in the balance of risks. It called for close scrutiny of risks arising from the Middle East conflict, stronger AI-related demand and FX volatility. Corporate demand for funding was also increasing, with lenders continuing to show a willingness to provide credit.

Rather than wait passively for inflation to rise, the BoJ would act proactively to adjust policy if necessary, Ueda said. However, with inflation needing to settle sustainably and stably around 2%, he cautioned that the Bank could not yet claim victory. Data, wage trends, financial conditions and the probability of the Bank’s economic outlook materialising will determine when, and how quickly, rates rise further. Ueda offered no suggestion of a fixed schedule for increases.

BoJ Keeps Further Rate Rises in View

Despite leaving rates unchanged, the BoJ maintained a hawkish stance. The pause reflected a desire for more evidence that inflation and wages could stay sustainably around 2%, rather than an abandonment of its tightening cycle. Further increases remain firmly under consideration, given the dissent in favour of an immediate rise, the clear warning about an inflation overshoot and the pledge to act proactively.