Tag: Japan

Today, and at the end of a two-day MPM (Monetary Policy Meeting), the BOJ’s (Bank of Japan) Policy Board held its benchmark interest rate steady at 0.75%. The decision to keep interest rates unchanged was reached by a majority decision by members of 6 – 3, which represents the biggest split under the present leadership of Governor Kazuo Ueda. Analysts advise that the split in the board’s decision suggests an indication that there could be a rate hike at the next MPM in June, with money markets offering a 68% chance of a rate increase.

Officials from the BOJ revised upwards their inflation estimates as supply-side risks were elevated due to the United States/Iran/Israel conflict in the Middle East. The three dissenting members voted to raise the benchmark interest rate to 1%, arguing the conflict had skewed price risks upwards. Officials also warned that economic growth may well deteriorate due to the negative impact of the current Middle East crisis which is increasing the price of crude oil. The BOJ also cut its forecast for growth from 1.00% to 0.50%, whilst raising its core inflation estimate (excludes food and energy prices) from 1.90% to 2.80%.

After the policy meeting, Governor Ueda said, “given the high level of uncertainty around the conflict in the Middle East, the likelihood of achieving our forecasts have declined. The bank wants to spend a little more time scrutinising how the Middle East conflict affects the economy and prices, and whether the risk to growth and inflation could change”. Governor Ueda went on to say, “the bank would make the appropriate decisions so that we do not fall behind the curve”, however, he did not give a timeline for the central bank to gauge whether the conditions were right to raise interest rates.  

Interestingly, one financial strategist suggested that the hawkish hold by the central bank was as much about currency defence as inflation control, signalling growing intolerance to further yen weakness as domestic and growth prove resilient. In 2026, the yen has weakened by circa 1.50% against the US Dollar and is currently trading at 159.12. Borrowing costs in Japan are at their highest level since September 1995, and as the war in the Middle East continues, interest rates can only rise further. Even if the conflict stopped tomorrow, it will still be many months before prices of crude oil and their offshoots will return to pre-conflict prices.

Interest Rate Decision and Market Reaction

Today, the BOJ (Bank of Japan) in a unanimous and widely expected decision raised its key interest rate to 0.75%, being the highest level since September 1995, whilst at the same time signalling that more interest rate increases are still to come. Experts pointed out that financial markets had predicted the increase in rates, and the yen weakened due to a lack of a stronger commitment from the central bank regarding further increases. After the rate decision, and in the usual non-committal verbiage of central bank chiefs worldwide, the Governor of the BOJ, Kazuo Ueda, said, “We’ll keep making appropriate decisions at each policy meeting, and the pace at which we adjust our rate will depend on the state of the economy and prices.”

Shift Away from Negative Interest Rates

In 2025, the central bank began abandoning negative interest rates, which had been in place since 2016, and data show that they have been gradually lifting interest rates, stating that their ambition was to see a “virtuous cycle” of rising wages and prices. The decision to increase rates came as the new Prime Minister of Japan, Sanae Takaichi, said she is keen to bring inflation down, but at the same time keeping government borrowing as cheap as possible. Interestingly, last year, before she took office, Prime Minister Takaichi described the idea of rate increases as stupid. However, since she took office in October of this year, she has not criticised the central bank governor.

Inflation Developments and Policy Constraints

Prime Minister Takaichi has made inflation her government’s priority, and recently released data showed underlying or core inflation (excluding food and energy) had increased to 3.00% in November, which is still 2.00% higher than the BOJ’s target benchmark figure. However, some financial market experts suggest that the rise in interest rates will not have a positive effect on inflation, as currency markets have already priced in the rate increase, confirming that the Japanese Yen remains relatively weak. Experts suggest that it may not be until Q3 that the BOJ hikes interest rates again due to Prime Minister Takaichi’s stand on monetary policy, plus the central bank will have to wait and see how today’s rate increase impacts the real economy*.

*The Real Economy – is defined as that part of the economy which is focused on producing, selling and consuming actual goods and services such as food, cars, haircuts, and construction that satisfy human needs. It is distinct from financial markets that trade in stocks and shares, bonds, loans, etc., that trade in money and assets.

Growth and Inflation Outlook

Experts in the Japanese economy have predicted a moderate yet stable growth of 0.60% for 2026, driven by domestic demand, ongoing corporate governance reforms and corporate investment in technology. However, some analysts have predicted that there may be a slowdown in growth from 2025 levels due to the impact of President Trump’s tariffs, plus a downturn in some other nations’ economies. On the inflation front, the BOJ has predicted that core inflation will decelerate to a range of 1.50% – 2.00%. Overall, experts and financial commentators suggest that the outlook is cautiously positive, with the economy expected to navigate a transition toward sustainable growth and mild inflation, subject to external risks and the careful management of domestic policy reforms.