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On January 23, 2026, the Bank of Japan (BOJ) decided to keep its policy rate at 0.75% by an 8-1 vote. While they did raise their GDP predictions to 0.9% for fiscal year 2025 and 1% for fiscal year 2026 because of a moderate global rebound and new wage-price activity in Japan.
Inflation remained high at 2.1% in December, exceeding the 2% target. The BOJ thinks it will drop below the goal in early 2026 and then stabilize. This allows them to raise rates if the economic situation improves. A snap election on February 8 and a large fiscal stimulus package of 783 billion USD create political unpredictability, which might delay things.
Governor Ueda stressed that they will watch the data carefully. He suggested caution before the election, even though one board member voted to raise rates to 1% because of lasting inflation risks. The markets are showing stress with unstable JGB yields, a weaker yen, and real rates that are still negative. The BOJ is more focused on keeping inflation at a sustainable 2% than reacting impulsively. Core CPI is predicted to be 2.7% in fiscal year 2026, then decrease to 1.9-2%. The risks are leaning upward because the weaker yen is making imports more costly.
Growth depends on the global economy recovering and Japan's wage-price situation. The timing of more tightening will depend on politics and market shakiness. Traders expect a small 20bp rate increase by June 2026, possibly to 1%, and a continued reduction in JGB purchases. Ueda's comments after the decision could change USD/JPY sentiment as currency traders are nervous.
