The Bank of Japan maintained its key policy rate at 0.75% following a decision on Friday, while simultaneously upgrading its economic growth forecasts. This action occurs as Japan prepares for an upcoming election.
The central bank revised its economic growth projection for the fiscal year ending March 2026 to 0.9% from the previous 0.7%. It also raised its GDP expansion outlook for the 2026 fiscal year to 1% from 0.7%. The Bank of Japan anticipates moderate GDP growth as other economies recover, foreseeing a virtuous cycle of increasing prices and wages supported by government economic measures and accommodative financial conditions.
The decision to keep the benchmark interest rate steady was made with an 8-1 split vote. This follows a rate increase in December, which brought the rate to its highest level in 30 years. Board member Hajime Takata proposed raising rates to 1%, citing upside risks to prices in Japan.
The bank predicts inflation will fall below its 2% target in the first half of the year but expects underlying inflation to continue rising moderately. Masahiko Loo, senior fixed income strategist at State Street Investment Management, indicated that underlying inflation remains supported by wage growth and service prices, which continue to exceed 2%. This, according to Loo, reinforces the view that the BOJ's normalization path will persist gradually.
December inflation data for Japan showed headline price growth at 2.1%, marking its lowest point since March 2022 but remaining above the BOJ's 2% target for the 45th consecutive month. "Core-core" inflation, which excludes fresh food and energy, registered 2.9% in December.
Japan initiated its policy normalization process in March 2024, ending its negative interest rate regime. The central bank has emphasized that further rate increases are contingent on a virtuous cycle of wage and price growth. This policy has faced political pressure, with figures like Prime Minister Sanae Takaichi advocating for softer rates to stimulate economic growth. Japan's economy experienced a contraction of 0.6% quarter-on-quarter in the third quarter, an annualized decline of 2.3%.
BOJ Governor Kazuo Ueda stated on Friday that the bank intends to continue raising interest rates if its economic and price forecasts are realized.