BOJ holds rates at 0.75%, Lifts core inflation outlook. Dissent highlights inflation risk

The BOJ held rates steady but highlighted firmer underlying inflation and rising internal debate over the pace of tightening.

Summary:

• Core-core inflation forecasts revised higher across years

• Growth outlook upgraded for FY25 and FY26

• FX volatility and wage pass-through seen as rising risks

Policy decision

The Bank of Japan kept its overnight call rate unchanged at 0.75%, with the decision approved by an 8–1 board vote. Board member Takata dissented, arguing that Japan had effectively achieved its price stability objective and that inflation risks were skewed to the upside amid improving overseas economic conditions.

Takata proposed raising the short-term policy rate to 1.0%, citing rising price pressures and a more favourable external environment. The proposal was rejected by the majority, highlighting a growing divergence within the board over the appropriate pace of policy normalisation.

Inflation forecasts

The BOJ left its core CPI forecast for fiscal 2025 unchanged at 2.7%, while nudging up projections further out. The median core CPI forecast for fiscal 2026 was revised to 1.9% from 1.8%, while the fiscal 2027 outlook remained steady at 2.0%.

More notably, forecasts for “core-core” inflation, excluding both fresh food and energy, were revised higher across the horizon. The median forecast for fiscal 2025 rose to 3.0% from 2.8%, for fiscal 2026 to 2.2% from 2.0%, and for fiscal 2027 to 2.1% from 2.0%. These revisions reinforce the view that underlying domestic inflation pressures remain firmer than previously expected.

The BOJ said core inflation is likely to dip below 2% through the first half of this year due to base effects, before settling at levels broadly consistent with its 2% target in the second half of the projection period.

Growth outlook

The central bank upgraded its growth outlook for fiscal 2025 and 2026, lifting median real GDP forecasts to 0.9% and 1.0% respectively, from 0.7% previously. The fiscal 2027 forecast was trimmed slightly to 0.8% from 1.0%.

Japan’s potential growth rate was estimated at around 0.5%, underscoring the structural constraints facing the economy even as the recovery continues. The BOJ said the economy is recovering moderately, though some areas of weakness persist.

Risks and assessment

The BOJ judged risks to both growth and inflation as roughly balanced, but flagged several sources of uncertainty. These include the impact of global trade policies, domestic wage- and price-setting behaviour, and developments in financial and foreign exchange markets.

The central bank said inflation expectations are rising moderately and that the mechanism linking wages and prices is likely to be sustained. It also warned that FX volatility now has a larger impact on prices than in the past, as firms have become more willing to pass higher costs through to consumers. Rising food prices, including rice, were described as largely reflecting temporary supply-side factors.

Next up is Bank of Japan Governor Ueda at 0630 GMT, press conference