Bank of Japan Holds Policy Rate at 1.25% Amid Inflation Forecast Adjustments
The Bank of Japan will likely keep its benchmark interest rate steady at 1.25% at its policy meeting ending Friday, Reuters reported. The decision comes as policymakers balance moderate price and wage growth against the risk of an inflation overshoot driven by global factors.
While the central bank is expected to maintain its current rate via a majority vote to evaluate the impact of previous tightening, it plans to revise its next fiscal year price forecast upward in a quarterly outlook report. This adjustment signals that underlying inflation has roughly achieved the bank’s 2% target, marking a symbolic departure from the BOJ’s prolonged efforts to fire up inflation through ultra-loose monetary policy.
Policy Pivot and Global Inflationary Pressures
Under former governor Haruhiko Kuroda, the central bank deployed a massive stimulus program in 2013 to pull Japan out of deflation. Even after ending those unorthodox easing steps in 2024, policymakers moved cautiously because underlying inflation remained below target. However, stubbornly high energy costs, rising import prices from a weak yen, and brisk global artificial intelligence demand have intensified inflationary pressures worldwide.
The Bank of Japan raised its policy rate in September following an earlier hike in June, shortening the interval between adjustments compared to the roughly twice-a-year hikes in 2024 and 2025. With the rate now resting at 1.25%, it sits within the estimated neutral range of 1.1% to 2.5% where monetary policy neither cools nor overheats the economy.
December Rate Hike Expectations and Market Focus
Financial markets are closely watching Governor Kazuo Ueda’s post-meeting briefing for clues regarding future normalization. Analysts polled by Reuters expect the central bank to lift rates to 1.5% in December and maintain a quarterly pace of tightening.
Despite signaling a shift toward anchoring inflation around the 2% target, officials are expected to avoid explicit commitments on the exact timing of future moves. According to sources familiar with the discussions, strong growth in bank lending will allow the central bank to emphasize that financial conditions remain loose, leaving scope for additional hikes before borrowing costs reach neutral levels.
The Japanese policy decision follows similar moves by international counterparts. The U.S. Federal Reserve is seen skipping a rate hike during its meeting concluding on Wednesday, while the European Central Bank kept its rate unchanged at 2.5% on Thursday.
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