BOJ Holds Rate at 1.25%. Inflation Forecast to 2.6%

The Bank of Japan (BOJ) left its short-term policy interest rate unchanged at 1.25% on Friday, 30 October, in an 8-1 vote, Reuters reported, while the central bank said underlying inflation in Japan is now broadly in line with its 2% price stability target.

Board member Hajime Takata dissented from the decision, according to Reuters. Analysts from Deutsche Securities and SMBC quoted in the report described the dissent as a call for a rate increase.

Inflation outlook raised

In its quarterly Outlook Report, released after the two-day meeting on 29-30 October, the BOJ’s policy board raised its median forecast for core consumer prices, which exclude fresh food, in fiscal 2027 to 2.6% from 2.4% projected in July. The bank attributed the upgrade partly to the rise in crude oil prices since the summer. The fiscal 2026 forecast was kept at 2.5%, while fiscal 2028 was projected at 2.0%.

The median forecast for inflation excluding both fresh food and energy in fiscal 2027 was lifted to 2.7% from 2.6%. Real GDP growth is projected at 0.7% for fiscal 2026, up from 0.6% in July, at 0.7% for fiscal 2027, down from 0.8%, and at 0.8% for fiscal 2028. The board said its growth projections were more or less unchanged.

The BOJ said underlying CPI inflation is generally consistent with its 2% target and is expected to stay around that level, adding that risks to the price outlook are skewed to the upside. It noted that “there has recently been a shift in the phase of monetary policy” and said it will continue to raise the policy rate in response to developments in the economy, prices and financial conditions. The forecasts exclude a proposed temporary cut in the consumption tax on food and beverages, which the bank estimated would lower fiscal 2027 core inflation by about 1.3 percentage points if implemented.

At his press conference, Governor Ueda said the central bank will adjust policy to stabilise underlying inflation at 2%, Jiji Press reported via nippon.com. He said the target has not yet been reached in a sustainable and stable way and that the BOJ will assess upside risks to prices and revise policy at an appropriate time.

Faster ETF sales

Bank of Japan HQ

The BOJ also decided to speed up sales of its exchange-traded fund (ETF) holdings, according to analysts cited by Reuters. Masahiko Loo of State Street Investment Management estimated the disposal would now take 43 years rather than 112, with annual sales at roughly 0.1% of market turnover. Masato Koike of Sompo Institute Plus described the ETF move as the surprise of the meeting.

Shuhei Uehara of Gaitame.com Research Institute said the dollar fell against the yen after the decision before paring its losses. Loo called the meeting “a boring hold, but an important shift in the Outlook Report.”

What’s next

Several analysts quoted by Reuters see December as a possible date for the next hike. Kazutaka Maeda of Meiji Yasuda Research Institute said the December meeting is a credible opportunity for a move and that the BOJ may be considering increases every three months, while Invesco’s David Chao and Koike also pointed to December. Loo expects the next hike around the turn of the year.

Others were more cautious. Hirofumi Suzuki of SMBC said the BOJ is under no pressure to rush into a rate hike, and Tohru Sasaki of Fukuoka Financial Group said Ueda cannot be too hawkish if Japanese stocks fall sharply.

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