Bank of Japan Holds Rate at 1.25 Percent and Says Inflation Has Reached Its Target

The Bank of Japan kept its short-term policy rate at 1.25 percent on Friday, October 30, by a vote of 8 to 1, and said underlying inflation has reached its 2 percent target.

Board member Hajime Takata dissented. He proposed raising the policy rate to 1.50 percent, arguing that underlying core consumer price inflation had reached the 2 percent price stability target. The other eight board members voted to hold.

A hold with a changed message

The rate itself did not move, and no one in markets expected it to. All economists surveyed by Bloomberg predicted the hold, and Japan's benchmark rate is already at a 31 year high. What changed was the wording in the bank's Outlook Report. The BOJ judged that underlying inflation, excluding temporary factors, is now at a level generally consistent with its 2 percent price stability target. That is a clear shift from its previous assessment, which said underlying inflation was approaching the target.

The bank also revised up its inflation forecast and stressed again its readiness to keep pushing up borrowing costs to head off inflation risks. The median projection for core consumer prices in fiscal 2027 was raised to 2.6 percent from 2.4 percent. The median projection for fiscal 2026 stayed at 2.5 percent, unchanged from July. The bank slightly lowered its growth outlook at the same meeting.

Shoki Omori, chief Japan fixed income strategist at Deutsche Securities in Tokyo, said: "By judging that underlying inflation has reached 2%, the BOJ has changed what it is trying to do: it is no longer a central bank trying to get to its target, it is one trying to keep inflation from running away from it."

Masahiko Loo, chief fixed income strategist at State Street Investment Management in Tokyo, called it "a boring hold, but an important shift in the Outlook Report."

Markets and what comes next

The yen strengthened after the decision, moving to around 157.12 per dollar from 157.52 just before the announcement. More than 80 percent of economists expect another BOJ rate increase in December, according to Bloomberg.

The BOJ was the last of three major central banks to meet this week. The Federal Reserve and the European Central Bank also left their rates unchanged.

The bank also decided to speed up sales of its holdings of exchange traded funds. Starting in January it will sell at nearly triple the previous pace, an estimated 860 billion yen a year, about 5.5 billion dollars. At that pace the estimated time to unwind the holdings falls from 112 years to 43 years. The annual sales amount to only around 0.1 percent of market turnover, a point analysts made when judging the market effect as small.

Governor Kazuo Ueda will hold a news conference at 3:30 p.m. local time, 0630 GMT, to explain the decision. Traders will listen for how strongly he backs a December move, after a meeting that held the rate but changed the message on inflation.