BOJ Holds Interest Rates Steady, Upgrades Growth and Inflation Outlook for Japan

The Bank of Japan (BOJ) kept interest rates unchanged on Friday, a decision that aligned with market expectations, while delivering a more optimistic outlook for Japan’s economic growth and inflation. The central bank left its benchmark overnight call rate at 0.75%, with eight out of nine board members voting in favor of maintaining current policy. One member, Hajime Takata, dissented by supporting a 25 basis point rate hike, highlighting emerging divisions within the BOJ over the timing of further tightening.

This policy hold follows a 25 basis point rate increase implemented in December and reflects the BOJ’s cautious approach as it waits for clearer signals on wage growth and economic momentum. The central bank reiterated that interest rates are likely to continue rising if economic activity and inflation evolve in line with its forecasts, keeping its long-term focus on sustainably achieving its 2% inflation target.

In a notable shift, the BOJ upgraded its growth projections for the coming years. Real GDP growth for fiscal 2025 is now expected to range between 0.8% and 0.9%, compared with the previous estimate of 0.6% to 0.8%. For fiscal 2026, growth is forecast at 0.8% to 1.0%, also higher than earlier projections. These revisions reflect expectations of stronger domestic demand and increased fiscal support from the government.

On inflation, the BOJ slightly lowered its core consumer price index outlook for fiscal 2025 but raised its forecast for fiscal 2026 to between 1.9% and 2.0%. The central bank expects inflation to ease in early 2026 before accelerating again later in the year, supported by tighter labor market conditions and improving economic activity.

The BOJ’s outlook assumes stronger private consumption as the government implements measures to reduce energy costs and moves toward tax reforms. However, concerns remain over how Prime Minister Sanae Takaichi plans to finance increased fiscal spending and potential tax cuts, particularly given Japan’s heavy public debt burden. These concerns have fueled volatility in Japanese bond markets and pressured the yen, which weakened slightly following the BOJ’s announcement.