BOJ keeps rates steady, raises growth forecasts
The Bank of Japan kept interest rates steady on Friday and raised its economic and inflation forecasts, signaling confidence that a moderate recovery would justify further raising still-low borrowing costs.
Markets are focusing on Governor Kazuo Ueda’s post-meeting press conference for clues on when the BOJ might raise interest rates next; This decision was complicated by new market volatility caused by Prime Minister Sanae Takaichi’s decision to call early elections next month.
The central bank is torn between hawkish communication and the need to keep yen bears at bay without triggering a further rise in bond yields on expectations of higher spending by the Takaichi government.
At the two-day meeting that ended Friday, the BOJ kept its key policy rate at 0.75 percent, in a widely expected decision, after just raising the interest rate from 0.5 percent in December.
In its quarterly outlook report, the BOJ raised its growth forecast for fiscal years 2025 and 2026 and maintained its view that the economy would remain on a moderate recovery path.
It also raised its core consumer inflation forecast for fiscal 2026 to 1.9 percent from 1.8 percent three months ago, adding that risks to the economic and price outlook are roughly balanced.
The central bank also maintained its promise to continue raising interest rates if economic and price developments progress in line with its forecasts.
“The mechanism by which wages and prices rise together moderately will be maintained and headline inflation will be allowed to continue to rise moderately,” the BOJ said in its report.
Japan’s economy has weathered the blow from US tariffs and is likely to get a boost from Takaichi’s stimulus package, which focuses on steps to cushion the blow from rising living costs.
But the prime minister’s pledge to strengthen expansionary fiscal policy and suspend the 8.0 percent sales tax on food has raised fears of additional debt issuance and led to a rise in bond yields that could hurt the economy.
The rise in yields has drawn renewed attention to the BOJ’s quantitative tightening plan, in which it unwinds years of massive stimulus by gradually slowing bond purchases at a set pace to shrink its massive balance sheet.
The BOJ has been reducing bond purchases at a predetermined moderate pace since 2024. But it said it may suspend that tapering or conduct emergency bond-buying operations to deal with extreme market stress.
Some analysts think that the BOJ may use these tools in the near future. But the central bank has put a major hurdle in implementing these measures, as accelerating bond purchases would run counter to its efforts to wean the economy off the stimulus it has implemented to combat years of deflation.
Ueda has repeatedly said that bond yields should be determined by markets, but that if they make “exceptional, unusual moves” the BOJ will step in.
The BOJ changed course in 2024, raising its policy rate several times and reducing bond purchases on the view that Japan was on the verge of permanently reaching the bank’s 2.0 percent inflation target.
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