The Bank of Japan (BOJ) raised its growth estimate and maintained its inflation forecasts on Friday, even maintaining steady interest rates, signalling its confidence that a moderate recovery would justify raising still-low borrowing costs further.
Though cautious of the inflationary effects of a weakening yen, the central bank said that the currency’s movement could convince firms to pass on rising import costs and increase underlying consumer prices.
During a two-day meeting, the BOJ upheld its key policy rate of 0.75% after recently hiking the rate up from 0.5% in December. The BOJ also raised its growth forecast for the fiscal year 2025-2026 and remains firm in its belief that the economy will stay on course for a moderate recovery, according to a quarterly report.
The bank revised its core consumer inflation forecast for 2026, up from 1.8% three months ago, to 1.9%. They added that risks to the economic and price outlook are nearly balanced.
“The mechanism in which wages and prices rise moderately in tandem will be sustained, allowing for underlying inflation to continue rising moderately,” the BOJ said in the report.
Rate Hikes Again?
Governor Kazuo Ueda’s post-meeting conference hinted at when the BOJ may plan to raise the rates; however, the decision has been made complicated by recent market volatility brought on by Prime Minister Sanae Takaichi’s snap election next month.
“After its hike in December, it is no surprise that the BOJ remained on hold today. However, the central bank’s outlook report hints at growing hawkishness, with officials revising up their growth forecasts for the coming year and, crucially, also nudging up their inflation expectations for the next couple of years,” said Fred Neumann, chief Asia economist at HSBC in Hong Kong.
Inflation To Increase?
The BOJ provided a largely optimistic view of the economy three months ago, stating in the report that the cycle of income and expenditure will “gradually strengthen.” However, they also stated that underlying inflation will continue to increase.
Japan’s economy has not been spared from the U.S. tariffs, but will likely see a lift from the Prime Minister’s stimulus package, hoping to cushion the blow of the rising cost of living.
But Takaichi’s promises to suspend the 8% sales tax on food and strengthen her fiscal policy have brought on concern of added debt issuance. This could lead to a spike in bond yields, ultimately hurting the economy.
A recent yield spike has brought attention back to the BOJ’s quantitative tightening plan. It has been unwinding massive stimulus by gradually slowing bond buying at a set pace. The bank has been decreasing bond buying since 2024 at a moderate pace to cope with extreme market stress.
Ueda has repeatedly said that while bond yields should be set by markets, the BOJ will step in if they make “exceptional, unusual moves.”
(with inputs from Reuters)
