Hold steady! The Bank of Japan maintains interest rates, with one member supporting a rate hike

The Bank of Japan maintained its policy interest rate at 0.75% on Friday, in line with market expectations, but raised its medium- to long-term inflation forecasts, indicating a more optimistic assessment of price pressures. This is the first monetary policy meeting since the bank raised interest rates last month, and it is currently evaluating the actual impact of the rate hike on the economy.

In its latest outlook report, the bank raised its core CPI forecast for the fiscal year 2026 from 1.8% to 1.9%, while the core-core CPI forecast was raised from 2.0% to 2.2%. The bank also expects that in the latter half of the forecast period, the underlying core inflation rate may be at a level consistent with the 2% target.

The decision on this rate was passed with a vote of 8 to 1. Committee member Takeda voted against, proposing to raise the rate from 0.75% to 1.0%, believing that the price stability target has been largely achieved. This is the latest indication of internal disagreement within the bank regarding the pace of interest rate hikes.

Bank Governor Kazuo Ueda will elaborate on the direction of interest rates and inflation outlook at a later press conference, and his statements may influence the yen's exchange rate.

Moderate Rise in Inflation Expectations

The Bank of Japan maintained its core CPI forecast for the fiscal year 2025 at 2.7%, but raised expectations for the next two fiscal years. The core CPI forecast for the fiscal year 2026 was raised from 1.8% to 1.9%, while the forecast for the fiscal year 2027 remains at 2.0%.

The core-core CPI forecast, which better reflects underlying price trends, saw a more significant upward adjustment. The forecast for the fiscal year 2025 was raised from 2.8% to 3.0%, for the fiscal year 2026 from 2.0% to 2.2%, and for the fiscal year 2027 from 2.0% to 2.1%.

The bank stated that inflation expectations are rising moderately, and medium- to long-term inflation expectations may continue to rise moderately. However, the bank also pointed out that the core consumer inflation rate may slow to below 2% in the first half of this year.

Improved Economic Growth Expectations

The bank also raised its short-term economic growth forecasts. The actual GDP growth rate forecast for the fiscal year 2025 was raised from 0.7% to 0.9%, and for the fiscal year 2026 from 0.7% to 1.0%. The forecast for the fiscal year 2027 was lowered from 1.0% to 0.8%.

The bank assesses that the Japanese economy may continue to recover moderately, with the output gap expected to expand moderately as trends improve. The bank expects Japan's potential growth rate to be around 0.5% in the near term and will maintain a mechanism for wages and inflation to rise in sync.

The bank stated that the risks to the economic outlook are roughly balanced, and the risks to the inflation outlook are also roughly balanced.

Focus on Yen, Trade Policy, and Imported Inflation

The bank specifically mentioned in its policy statement that attention should be paid to how the yen's exchange rate movements are likely to affect inflation. There remains uncertainty in the global economic outlook, such as the impact of trade policies, which may lead to supply-side driven increases in import prices.

The bank pointed out that the trade policies announced so far may weigh on the global economy and could even trigger a change in globalization trends. Factors to watch regarding the U.S. economy include the impact of tariffs on worsening corporate profits and their effects on employment and income.

The bank warned that if import prices rise significantly, households' defensive mindset towards spending may further strengthen. However, the bank believes that the recent rise in food prices, such as rice prices, largely reflects temporary supply-side factors The central bank stated that the risks facing the outlook include the impact of trade policies on the overseas economy, the wage and price-setting behavior of domestic enterprises, and the developments in financial and foreign exchange markets. The bank emphasized that it will conduct appropriate monetary policy operations from the perspective of sustainably and steadily achieving the 2% inflation target. The central bank also stated that there have been no significant imbalances in Japanese financial activities, and the overall stability of the Japanese financial system is maintained