The Bank of Japan (BOJ) unanimously held interest rates at 0.5% as expected

Japan’s central bank, BOJ, unanimously voted to hold interest rates at 0.5% as expected, and revised its inflation projection from 2.2% to 2.7%. Shoki Omori, the Chief Desk Strategist at Tokyo’s Mizuho Securities, was among the many professionals who expected the BOJ to raise its 2025 inflation forecast and hold rates steady.     

The BOJ raised short-term policy rates to the current 0.5% in January this year after exiting a 10-year-long monetary stimulus program last year. The rates have been held steady since then. However, the Chief Currency Strategist at Tokyo’s SMBC, Hirofumi Suzuki, believes that today’s decision by the BOJ to maintain interest rates unchanged justified a rate hike in September or October.

David Chao, a Global Market Strategist for Asia-Pacific at Singapore’s Invesco, said today’s announcement increased the chances of an earlier-than-expected rate hike, possibly in October.   

The BOJ’s quarterly outlook report also disclosed high (mostly tariff-related) uncertainty regarding the impacts of trade policy changes on prices and overseas economies. The central bank’s observation was less pessimistic than its May report, which suggested the level of trade policy-related uncertainty was “extremely high.” However, it predicted that inflation would drop to 1.8% in 2026 and slightly jump to 2% in 2027. These predictions were higher than May’s forecast of 1.7% inflation in 2026 and 1.9% in 2027.

Chao says raising the inflation forecast suggests a possible rate hike

Invesco’s Chao said the BOJ’s inflation forecast increase suggested that rates were more likely to go up. Kasutoshi Inadome, a Senior Strategist at Tokyo’s Sumitomo Mitsui Trust Asset Management, thought today’s announcement was generally “hawkish” as expected.

He explained that the central bank’s claim of a balance between risks and prices was a sign that the central bank was turning hawkish. Inadome also noted that the BOJ’s estimation of lower global trade uncertainty was a reaction to tariff-related trade deals made with the United States.

The Head of Asia Research at ANZ, Khoon Goh, said today’s decision was no surprise, adding that the BOJ had previously hinted at the possibility of raising its inflation rate forecast. However, Goh wondered if the ongoing uncertainty in the global trading landscape was enough for the central bank to hold off on a rate hike again. He believes there is a justification for a rate hike in October.

“Now, the fact that Japan has finally reached a deal with the U.S. does remove some element of that uncertainty for themselves. So I think the question is whether the BOJ is now prepared to hike in October.”

–Khoon Goh, Head of Asia Research at ANZ

Masato Koike, the Senior Economist at Tokyo’s Sompo Institute Plus, has maintained since April that 0.5% was the BOJ’s terminal rate. However, he seemed to change his tune as he saw the possibility of a rate hike this year, following the seeming success of tariff negotiations. 

Sasaki claims the ‘revise up’  for inflation is ‘moderate’

The Tokyo Fukuoka Financial Group Chief Strategist, Tohru Sasaki, claimed the “revise up” for the 2026 inflation forecast was “moderate.” He emphasized that this was a sign that the BOJ was cautious about the risks of its inflation projections. Sasaki pointed out that the central bank’s inflation outlook was hawkish, adding that the central bank could “revise up” interest rates soon. However, he noted a dark cloud was still hanging over the Japan-U.S. trade talks, sparking uncertainty.

SMBC’s Suzuki claimed that the BOJ’s upward revision of its inflation forecast for 2025 was higher than expected. However, he said it was important that the 2027 inflation forecast was set at 2%. Charu Chanana, the Chief Investment Strategist at Singapore’s Saxo, believes the September meeting could potentially end with a decision to hike rates, assuming the central bank’s revised outlook aligns with incoming data.  

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