Bank of Japan Holds at 1.25% and Says Underlying Inflation Now Matches Its 2% Target

Photo: yt_siden, Wikimedia Commons, CC BY-SA 2.0 (file photo, 2011). Bank of Japan head office, Tokyo.

The Bank of Japan kept its short-term policy rate at around 1.25% on Friday, Oct. 30, but for the first time since adopting its 2% inflation goal in 2013 it judged underlying inflation to be “generally consistent” with that target. The Bank of Japan rate decision passed on an 8-1 vote, with one board member pushing for an immediate increase to 1.5%, according to the bank’s policy statement.

The rate remains the highest in Japan since 1995, CNBC reported. The BOJ raised it to 1.25% at its Sept. 17-18 meeting on a 7-2 vote, according to the bank.

A dissent for a faster hike

Board member Hajime Takata voted against the decision. The BOJ statement said Takata considered that, with underlying inflation having reached the price stability target, the situation had moved into a new phase in which the bank needs to speed up bringing its policy rate closer to the neutral rate. His proposal for a 1.5% rate was defeated by a majority vote. Governor Kazuo Ueda and the other seven members backed the hold.

The inflation verdict

In its October Outlook Report, the bank wrote that “underlying CPI inflation is at a level that is generally consistent with the price stability target of 2 percent, and is expected to remain at around that level.” Before this, the BOJ had described underlying inflation as approaching 2%, CNBC noted.

The Outlook Report said risks to prices are skewed to the upside, warning that inflation expectations could rise and underlying inflation could move above target because “firms’ behavior has been shifting more toward raising wages and prices.” It cited higher energy prices tied to the situation in the Middle East, rising global demand related to artificial intelligence and the yen’s earlier depreciation as forces pushing prices up. Based on futures markets, the bank assumes Dubai crude falls from about $105 a barrel to about $70 by the end of the projection period.

By the numbers: what changed in the forecasts

The Policy Board’s median forecast for core consumer prices (excluding fresh food) in fiscal 2027 rose to 2.6% from 2.4% in July, and the forecast for prices excluding fresh food and energy rose to 2.7% from 2.6%. Growth forecasts were little changed: real GDP is projected to grow 0.7% in fiscal 2026 (up from 0.6%) and 0.7% in fiscal 2027 (down from 0.8%), the Outlook Report shows.

TBR analysis of the BOJ tables: the fiscal 2027 core inflation revision of 0.2 percentage points was the largest of the nine median forecasts, and every core inflation median for fiscal 2026 through 2028 is at or above 2.0%. Core inflation is projected to ease to 2.0% in fiscal 2028 as the effect of high oil prices fades.

How the BOJ sees the economy

The bank’s assessment of current conditions was mixed. Japan’s economy “has recovered moderately, although some weakness has been seen in part,” partly because of the Middle East situation, the Outlook Report said. Exports have risen moderately on global AI-related demand, corporate profits are at high levels, and private consumption has been resilient as employment and income improve, while housing investment has been on a declining trend. Labor market conditions remain tight, and the bank said medium- to long-term inflation expectations are around 2%.

Looking ahead, the BOJ expects growth to continue at a slower pace in fiscal 2026 as higher energy and raw material prices weigh on activity, with government measures, accommodative financial conditions and AI-related demand providing support. It projects growth to pick up moderately from fiscal 2027 as those price effects wane. The bank described risks to economic activity as generally balanced.

Faster ETF sales

In a unanimous vote, the board also more than doubled the pace at which it sells its holdings of exchange-traded funds, to about 860 billion yen a year on a book-value basis from about 330 billion yen. That is about 0.1% of stock-market trading value, up from about 0.05%, and is equal to roughly 2.46 trillion yen a year at market value, the statement said. The change takes effect in January 2027. The bank began selling ETFs, bought during years of monetary easing, in January 2026.

Market expectations and next steps

All 16 economists in a CNBC survey before the meeting expected the BOJ to prepare the ground for a rate hike in December or January, and 13 saw the rate peaking at 1.75% to 2% by around mid-2027. Krishna Bhimavarapu, an economist at State Street Investment Management, called Friday’s decision a “hawkish hold,” CNBC reported.

The board’s next meeting is Dec. 17-18. A summary of opinions from this week’s meeting is due Nov. 10, and the full Outlook Report text on Nov. 2, according to the BOJ. For other central bank and markets coverage, see TBR’s report on U.S. third-quarter GDP and the Oct. 30 Business Report.

Sources

• Bank of Japan: Statement on Monetary Policy, Oct. 30, 2026 (PDF)
• Bank of Japan: Outlook for Economic Activity and Prices (October 2026), The Bank’s View (PDF)
• Bank of Japan: Statement on Monetary Policy, Sept. 18, 2026 (PDF)
• CNBC: BOJ holds rates as underlying inflation aligns with 2% target for first time since 2013

Additional sources

• Nippon TV (Japanese): BOJ decision report
• Bank of Japan: Monetary Policy Meeting schedule