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The Bank of Japan (BOJ) left its benchmark interest rate unchanged at 1 per cent on Friday but reinforced its commitment to tightening monetary policy further if inflation and economic conditions continue to evolve as expected, signalling that Japan’s rate-hike cycle is far from over.
The decision, which came at the end of the central bank’s two-day policy meeting, was widely expected by markets. However, policymakers struck a distinctly hawkish tone by stressing that inflation risks remain tilted to the upside and that further increases in borrowing costs could be warranted.
The BOJ voted 8-1 to maintain its short-term policy rate at 1 per cent. Board member Hajime Takata dissented, arguing that the central bank should immediately raise the benchmark rate to 1.25 per cent to guard against mounting price pressures.
BOJ reiterates commitment to further tightening
In its policy statement, the central bank reaffirmed that it remains on course to gradually normalise monetary policy after years of ultra-low interest rates.
“The BOJ will continue to raise the policy rate and adjust the degree of monetary accommodation in response to developments in economic activity and prices as well as financial conditions,” the central bank said.
The language suggests policymakers remain confident that Japan is moving closer to achieving stable, demand-driven inflation, even as they pause to assess the impact of previous rate increases.
Friday’s decision also came a day after Japanese authorities reportedly intervened in the foreign exchange market by buying yen and selling dollars to stem the currency’s sharp decline, according to a market source.
Inflation outlook remains firm
The BOJ’s latest quarterly outlook painted a broadly optimistic picture of Japan’s inflation trajectory.
It said underlying inflation is approaching its 2 per cent target as companies increasingly pass on higher costs through wage hikes and price increases. Policymakers also expect the cycle of rising wages and prices to remain intact, supporting a sustained increase in inflation expectations.
The central bank said underlying inflation is likely to reach levels consistent with its 2 per cent target sometime between the second half of fiscal 2026 and fiscal 2027.
Although the BOJ marginally lowered its median forecast for core consumer inflation in fiscal 2026 to 2.5 per cent from 2.8 per cent, it raised its fiscal 2027 projection to 2.4 per cent from 2.3 per cent.
More importantly, the central bank warned that risks to the inflation outlook remain skewed to the upside, reinforcing expectations that additional policy tightening remains on the table.
The policy decision was not unanimous.
Takata, one of the BOJ’s more hawkish board members, voted against holding rates steady and instead proposed raising the short-term policy rate to 1.25 per cent.
According to the BOJ, Takata argued that Japan had entered a “new phase” in which the central bank needed to respond more quickly to upside inflation risks arising from overseas demand shocks and changing global financial conditions.
His proposal, however, failed to gain support from the rest of the board.
Focus shifts to Governor Ueda
Investors are now awaiting comments from BOJ Governor Kazuo Ueda, who is scheduled to hold a post-meeting press conference later on Friday.
Markets will closely watch his remarks for clues on the timing of the next rate increase, the central bank’s assessment of inflation and wage growth, and its views on the government’s intervention to support the yen.
Ueda also faces the delicate task of reassuring markets that the BOJ remains committed to normalising policy without fuelling further volatility in financial markets or strengthening the yen too rapidly.
Why the decision matters
The BOJ has been steadily dismantling years of ultra-loose monetary policy as Japan experiences its strongest and most sustained inflation in decades.
While the central bank opted to pause this month, Friday’s statement indicates that policymakers remain firmly biased towards further tightening. Combined with warnings that inflation risks are tilted to the upside and an unprecedented dissent calling for an immediate rate hike, the decision suggests that another increase in interest rates could come later this year if wage growth and inflation continue to surprise on the upside.
The policy stance also reflects the BOJ’s increasingly difficult balancing act — keeping inflation under control while supporting economic growth and preventing excessive weakness in the yen, which has raised import costs and intensified inflationary pressures.
With inputs from agencies.
