Japan Holds the Line at a 30-Year Rate Peak

The Bank of Japan began 2026 by keeping its short-term policy rate unchanged at 0.75%, the highest borrowing cost since September 1995.

The decision, expected by many, arrives just weeks before February’s snap election, reinforcing the sense that policy is now moving carefully through a more complex economic and political landscape.

One Dissent, Many Conditions

The vote passed 8-1, with Hajime Takata as the sole member calling for another hike. The rest of the board judged risks to growth and inflation as broadly balanced. While the BOJ reiterated that further rate increases remain possible, it tied any move firmly to data, underlining that normalization will continue, but without haste. In its updated outlook, the BOJ raised its FY2025 GDP forecast to 0.9% from 0.7%, pointing to support from a U.S.-Japan trade agreement and a sizable fiscal package. Measures include energy bill subsidies, expanded grants to local governments, and a sharp rise in defense spending, all aimed at stabilizing real incomes and supporting domestic demand.

Inflation Near Target, Not Over It

FY2026 GDP growth was revised up to 1.0%, while core inflation for the same year edged higher to 1.9%, just below the BOJ’s 2% goal. The projections suggest steady momentum, with price pressures present but not running out of control. BOJ struck a cautiously optimistic tone considering the current politics across countries. Markets now turn to Governor Kazuo Ueda’s press conference, where any hint about the post-election policy path could clear expectations for Japan’s next move.

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