The Bank of Japan (BOJ) decided to maintain its benchmark short-term interest rate at 0.75 percent during its regular policy meeting on Friday, marking the highest level in over three decades. The decision, made by an 8-1 majority vote, aligned with market expectations as the central bank continues its gradual monetary policy normalization following a decade of aggressive easing measures.
Board member Hajime Takata dissented, advocating for a rate hike to 1.0 percent, citing that the price stability target had been largely achieved and upside risks to inflation from recovering overseas economies. Despite this, the majority viewed economic and price outlook risks as balanced, opting for caution amid ongoing fiscal concerns and yen weakness.
The BOJ released its latest Outlook for Economic Activity and Prices, significantly revising upward its growth projections. For fiscal 2025, GDP growth is now forecasted at 0.9 percent annualized, up from October’s 0.7 percent estimate. For fiscal 2026, the projection rose to 1.0 percent from 0.7 percent, reflecting anticipated recovery in overseas economies and supportive government stimulus. Core inflation (excluding fresh food) for 2025 remains at 2.7 percent, while the 2026 forecast was slightly adjusted to 1.9 percent from 1.8 percent.
Japan’s economy is described as continuing to grow moderately, bolstered by wage increases, robust domestic consumption, and policy support. However, the BOJ emphasized vigilance over yen depreciation—down over 4 percent since October 2025—and fiscal sustainability risks ahead of the February snap election.
This decision follows the BOJ’s December 2025 hike to 0.75 percent, its third since ending negative rates in March 2024. The rate remains low globally, reflecting Japan’s unique challenges with persistent low inflation and deflationary pressures. Governor Kazuo Ueda has signaled further gradual hikes, potentially reaching 1.0 percent by mid-2026, contingent on sustained 2 percent inflation.
Market reactions were muted, with the yen stabilizing around 155 per dollar post-announcement. Japanese government bond yields edged higher, with 10-year JGBs at 1.1 percent. Equity markets saw modest gains, led by export-heavy sectors benefiting from a weaker yen.
The BOJ’s cautious stance comes amid global uncertainties, including U.S. trade policies under President Trump, China’s economic slowdown, and Europe’s sluggish recovery. Domestically, wage growth hit 2.5 percent in 2025—the strongest in decades—supporting consumption and inflation toward the 2 percent target.
Analysts view the decision as prudent, balancing normalization with growth risks. CME Group data confirmed market pricing for steady rates, with a 25-basis-point hike anticipated in March or later. The BOJ reiterated its data-dependent approach, monitoring corporate profits, household spending, and external demand.
This meeting underscores Japan’s delicate policy pivot from ultra-loose monetary conditions that fueled asset bubbles and debt accumulation. Since 2013’s “Abenomics,” the BOJ has expanded its balance sheet to over 120 percent of GDP. Recent hikes aim to normalize without derailing recovery.
Looking ahead, February’s election could influence fiscal policy, potentially prompting accelerated tightening if inflation persists. The BOJ remains committed to achieving stable 2 percent inflation sustainably.
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