MENA Newswire, TOKYO: The Bank of Japan on Friday left its benchmark short-term interest rate unchanged, keeping the target for the uncollateralized overnight call rate at around 0.75% as policymakers assessed the impact of a rate increase made in December. The decision followed a two-day policy meeting and was approved by an 8-1 vote, underscoring a cautious approach as the central bank weighs persistent inflation against uneven growth signals in parts of the economy.
The lone dissenter, board member Hajime Takata, proposed raising the policy rate to around 1.0%. In the policy statement, Takata said Japan’s price stability target had been more or less achieved and that risks to prices were skewed to the upside as overseas economies moved into a recovery phase. His proposal was defeated by a majority vote, leaving the policy rate unchanged for the intermeeting period.
In its quarterly Outlook for Economic Activity and Prices, the central bank said Japan’s economy has recovered moderately, though some weakness remains in parts of activity. It said financial conditions remain accommodative and that a virtuous cycle from income to spending is expected to intensify gradually, supported by government economic measures and easy financing conditions, while noting that trade and other policies in major jurisdictions could affect the outlook.
The Bank of Japan said consumer inflation, measured by the CPI excluding fresh food, has been around 2.5% recently, pushed up by higher food prices such as rice and other factors. It forecast that CPI inflation will decelerate to below 2% in the first half of 2026 as the effects of earlier food price increases wane and government measures to address rising prices take hold, while underlying inflation is expected to keep rising moderately as wage and price setting interact.
Monetary policy decision and vote split
The outlook report raised the projected real GDP growth rate ranges for fiscal 2025 and fiscal 2026 compared with the previous report, citing the effects of government economic measures and other factors. The median projection for real GDP growth in fiscal 2025 was 0.9%, with forecasts ranging from 0.8% to 0.9%. For fiscal 2026, the median was 1.0%, with a range of 0.8% to 1.0%. For fiscal 2027, the median was 0.8%, with a range of 0.8% to 1.0%.
For prices, the central bank’s median projection for CPI inflation excluding fresh food in fiscal 2025 was 2.7%, with a range of 2.7% to 2.8%. For fiscal 2026, the median was 1.9% with a range of 1.9% to 2.0%. For fiscal 2027, the median was 2.0% with a range of 1.9% to 2.2%. The report also projected CPI inflation excluding fresh food and energy at a median 3.0% in fiscal 2025, 2.2% in fiscal 2026, and 2.1% in fiscal 2027.
Inflation drivers and market conditions
Governor Kazuo Ueda said after the meeting that Japan’s economy is recovering moderately and that the central bank wants time to evaluate the effects of the December rate increase. He said financial conditions remain accommodative and reiterated that the pace of any further adjustments would depend on incoming data on growth, inflation and financial developments. Ueda also pointed to a shift in inflation dynamics, noting that earlier price increases were driven more by raw material costs, while labor costs have become a more important driver.
Ueda said long-term interest rates have risen sharply and that the central bank is prepared to respond if moves become abnormal. He reiterated that policymakers will scrutinize indicators such as consumption and capital expenditure to gauge how higher borrowing costs are filtering through to the broader economy. The Bank of Japan’s next scheduled monetary policy meeting is set for March 18 and 19.