Bank of Japan holds policy rate at 1%, cuts inflation forecast

• BoJ signals further rate hikes if economic and price outlook develops as expected
  

The Bank of Japan (BoJ) kept its policy interest rate unchanged at 1% on Friday, in line with expectations, while lowering its inflation forecast for fiscal 2026.

The decision was approved by an 8-1 majority following the bank’s two-day monetary policy meeting.

Board member Hajime Takata voted for a rate increase, arguing that the bank should respond flexibly to inflation risks stemming from external demand shocks and changes in global financial conditions.

The BoJ said Japan’s economy is expected to continue growing moderately in fiscal 2026, although at a slower pace.

Higher crude oil prices linked to developments in the Middle East are expected to weigh on economic activity, while government support measures, accommodative financial conditions and stronger global artificial intelligence demand should support growth.

Annual inflation excluding fresh food is expected to rise significantly above 2% from the second half of fiscal 2026 due to higher energy costs, the pass-through of wage increases, strong semiconductor demand and the recent depreciation of the yen.

Inflation is then projected to ease toward around 2% later in the forecast period as the impact of elevated oil prices fades.

The bank said risks to economic activity were broadly balanced, while risks to the inflation outlook were tilted to the upside.

It warned that shifts in corporate wage- and price-setting behavior and rising inflation expectations could push underlying inflation above its 2% target.

The BoJ reiterated that it would continue raising interest rates and gradually reduce monetary accommodation if economic activity, inflation and financial conditions evolve in line with its projections.

The bank lowered its fiscal 2026 inflation forecast excluding fresh food to 2.3%-2.7% from the 2.8%-3% range projected in April.

It also reduced its median forecast for inflation excluding fresh food and energy to 2.5% from 2.6%.