BOJ Holds Rates at 1% as Expected, but Could Accelerate Hikes
The Bank of Japan left interest rates unchanged at its July policy meeting on Friday, as widely expected. The decision passed by an 8-1 vote, with board member Hajime Takata the sole dissenter; he proposed raising the policy rate to 1.25%. The market focused particularly on the BOJ’s warning that core inflation could rise well above its 2% target. In its outlook, the central bank said Japanese core inflation was likely to accelerate from the second half of fiscal 2026, reaching a level “clearly above” 2%. Japan’s fiscal 2026 runs from March this year through March of the following year, meaning its second half covers September 2026 through March 2027. In its Outlook for Economic Activity and Prices, which summarizes the views of policy board members and others, the BOJ raised its forecast for Japan’s real gross domestic product growth in fiscal 2026 to 0.6%, up from its April projection. The BOJ said there were already signs that wage increases in Japan were being passed through to selling prices. It also said higher oil prices and the yen’s recent depreciation were adding to inflationary pressure. The central bank’s warning came as markets focused on concern over the yen’s excessive weakness. Japan appeared to have intervened in the foreign-exchange market late Thursday, while the U.S. government also conducted a “currency inquiry operation,” generally viewed as a precursor to foreign-exchange intervention. During Thursday’s New York trading session, the yen fluctuated around 163 per dollar before rebounding sharply to as high as 157.96 per dollar, its biggest intraday gain since December 2023. “The key message from last night’s measures is that there is still concern about excessive yen weakness,” Masahiko Loo, a senior fixed-income strategist at State Street Investment Management, said. “The key exchange-rate level may be a range between 162 and 165 yen per dollar, rather than a specific level.” Japan’s top foreign-exchange official, Atsushi Mimura, declined to comment Friday when asked whether intervention had taken place. U.S. Treasury Secretary Scott Bessent said in an interview on Thursday local time that the yen “appears to be significantly undervalued” and that “excessive volatility” was unhealthy. That could make traders more cautious in the short term and temporarily discourage further yen selling. The developments came amid continued speculation over whether the BOJ could accelerate its pace of rate increases. The central bank’s most recent hike was on June 16, 2026, when it raised its benchmark rate by 25 basis points from 0.75% to 1.00%, taking it to its highest level in 31 years, since 1995. Under the market’s previous expectation of one rate increase every six months, the BOJ’s next hike was thought likely to come around December this year. However, people familiar with the matter said BOJ officials had indicated before the decision that they were willing to accelerate the pace beyond the market’s expected schedule of one hike every six months. The BOJ did not explicitly say in its policy statement that it would accelerate rate increases. It did say, however, that because core inflation was approaching 2% and financial conditions remained accommodative, it would continue to raise the policy rate. The aim, it said, was to prevent inflation from rising above its 2% price-stability target and “adversely affecting the economy.” Against that backdrop, strategist Masahiko Loo predicted that the BOJ’s next hike could come in September or October rather than after the previously expected six-month interval. BOJ Governor Kazuo Ueda was scheduled to hold a news conference at 2:30 p.m. Beijing time on Friday. His comments on Japan’s inflation and interest-rate outlook could provide an important basis for the market’s assessment. “More importantly, the question is whether Ueda will signal that the pace of future rate hikes will accelerate. This will be the central issue of this meeting, and Ueda will provide the market with an answer at his news conference,” Wataru Aso, a product specialist at RBC BlueBay, said in a report.
The market focused particularly on the BOJ’s warning that core inflation could rise well above its 2% target. In its outlook, the central bank said Japanese core inflation was likely to accelerate from the second half of fiscal 2026, reaching a level “clearly above” 2%.
Japan’s fiscal 2026 runs from March this year through March of the following year, meaning its second half covers September 2026 through March 2027.
In its Outlook for Economic Activity and Prices, which summarizes the views of policy board members and others, the BOJ raised its forecast for Japan’s real gross domestic product growth in fiscal 2026 to 0.6%, up from its April projection.
The BOJ said there were already signs that wage increases in Japan were being passed through to selling prices. It also said higher oil prices and the yen’s recent depreciation were adding to inflationary pressure.
The central bank’s warning came as markets focused on concern over the yen’s excessive weakness. Japan appeared to have intervened in the foreign-exchange market late Thursday, while the U.S. government also conducted a “currency inquiry operation,” generally viewed as a precursor to foreign-exchange intervention.
During Thursday’s New York trading session, the yen fluctuated around 163 per dollar before rebounding sharply to as high as 157.96 per dollar, its biggest intraday gain since December 2023.
“The key message from last night’s measures is that there is still concern about excessive yen weakness,” Masahiko Loo, a senior fixed-income strategist at State Street Investment Management, said. “The key exchange-rate level may be a range between 162 and 165 yen per dollar, rather than a specific level.”
Japan’s top foreign-exchange official, Atsushi Mimura, declined to comment Friday when asked whether intervention had taken place. U.S. Treasury Secretary Scott Bessent said in an interview on Thursday local time that the yen “appears to be significantly undervalued” and that “excessive volatility” was unhealthy. That could make traders more cautious in the short term and temporarily discourage further yen selling.
The developments came amid continued speculation over whether the BOJ could accelerate its pace of rate increases. The central bank’s most recent hike was on June 16, 2026, when it raised its benchmark rate by 25 basis points from 0.75% to 1.00%, taking it to its highest level in 31 years, since 1995.
Under the market’s previous expectation of one rate increase every six months, the BOJ’s next hike was thought likely to come around December this year. However, people familiar with the matter said BOJ officials had indicated before the decision that they were willing to accelerate the pace beyond the market’s expected schedule of one hike every six months.
The BOJ did not explicitly say in its policy statement that it would accelerate rate increases. It did say, however, that because core inflation was approaching 2% and financial conditions remained accommodative, it would continue to raise the policy rate. The aim, it said, was to prevent inflation from rising above its 2% price-stability target and “adversely affecting the economy.”
Against that backdrop, strategist Masahiko Loo predicted that the BOJ’s next hike could come in September or October rather than after the previously expected six-month interval.
BOJ Governor Kazuo Ueda was scheduled to hold a news conference at 2:30 p.m. Beijing time on Friday. His comments on Japan’s inflation and interest-rate outlook could provide an important basis for the market’s assessment.
“More importantly, the question is whether Ueda will signal that the pace of future rate hikes will accelerate. This will be the central issue of this meeting, and Ueda will provide the market with an answer at his news conference,” Wataru Aso, a product specialist at RBC BlueBay, said in a report.