BOJ Holds Rates at 1.25% as Inflation Reaches 2% Target

Japan's central bank has declared that underlying inflation is broadly aligned with its 2% target for the first time since adopting the benchmark in 2013, while keeping its benchmark interest rate unchanged at 1.25%. The October 30, 2026, decision reflects growing confidence in sustained price increases but leaves room for further monetary tightening.

The Bank of Japan (BOJ) maintained its policy rate at 1.25%, its highest level since 1995. The decision passed by an 8-1 vote, with board member Hajime Takata dissenting and calling for an increase to 1.5%.

The central bank's latest assessment marks a shift from its previous language, which described underlying inflation as approaching 2%. The updated statement indicates that policymakers consider the inflation objective broadly achieved.

The BOJ also raised its fiscal year 2027 inflation forecast to 2.6%, up from 2.4%. Its core-core inflation projection, which excludes fresh food and energy prices, increased to 2.7% from 2.6%.

The central bank warned that inflation could exceed its target as companies increasingly adjust wages and selling prices.

"Firms' behavior has been shifting more toward raising wages and prices and there are various factors that could drive up prices," the BOJ said.

Krishna Bhimavarapu, APAC economist at State Street Investment Management, characterized the decision as a hawkish hold. He said the central bank appeared increasingly confident that inflation was becoming sustainable through stronger wages, prices and consumption.

However, Bhimavarapu cautioned that Japan's economic growth does not support an immediate acceleration in rate increases. He expects third-quarter GDP growth to lose momentum, with household consumption remaining the weakest component of the recovery cycle.

A CNBC survey of 16 economists conducted before the announcement found that all respondents expected the BOJ to prepare the market for another rate increase in December or January 2027. Thirteen economists projected that the central bank's eventual peak policy rate would reach between 1.75% and 2% around mid-2027.

Japan continues to face inflationary pressure from a weak yen and elevated energy costs. However, experts cited by CNBC said energy subsidies introduced by the Takaichi administration have helped contain reported consumer price increases.

Government figures showed that core inflation reached 2.1% in September, its highest level in 2026 and above market expectations.

Finance Minister Satsuki Katayama also told parliament earlier in October that Japan was approaching a period of sustained inflation supported by wage increases.

Separately, government data showed that inflation-adjusted wages increased for the eighth consecutive month in August, rising 1.5% from a year earlier. The continued wage growth points to an additional source of domestic inflationary pressure.