BoJ Holds Rates, Raises Inflation Forecast

The Bank of Japan kept its short-term policy rate unchanged at 0.75% at its April 2026 meeting, leaving borrowing costs at their highest level since September 1995. The widely expected decision passed by a 6–3 vote, amid uncertainty over the Iran conflict and surging energy prices. Board members Hajime Takata, Naoki Tamura, and Junko Nakagawa dissented, calling for a hike to 1.0%. In its quarterly outlook, the central bank raised its FY2026 core inflation outlook to 2.8% from 1.9%, citing higher crude oil prices that likely push up energy and goods costs. At the same time, policymakers trimmed the FY2026 growth forecast to 0.5% from 1.0%, reflecting softer domestic momentum. Still, the overall economy is expected to expand moderately, underpinned by government support measures, accommodative financial conditions, and resilient corporate profits. The FY2025 GDP projection was slightly lifted to 1.0% from 0.9%, backed by last year’s trade deal with Washington.

Japan’s Finance Minister Satsuki Katayama said recent market turmoil has highlighted how quickly interest rates can be influenced by volatility spilling over from other markets, a dynamic she warned is becoming too significant to ignore. Katayama noted that “financial markets have seen an excessive degree of volatility since February 26, far beyond what would normally be warranted,” stressing that such instability can accelerate rate movements more than expected. The minister added that “interest-rate increases transmitted from other markets can materialise much more rapidly than we anticipate,” underscoring the speed of global financial linkages. The issue was widely recognized during a recent meeting with Group of Seven counterparts, Katayama noted, calling for a more “renewed and well-considered” policy response to manage these cross-market spillovers.

Further policy rate hikes in Japan remain appropriate as economic activity and prices improve, with monetary accommodation to be reduced gradually if the outlook holds. The Bank of Japan’s March Summary of Opinions noted that despite earlier increases, financial conditions remain loose, and investment pullbacks have largely reflected labor shortages and rising material costs rather than higher rates. Still, uncertainty from the Middle East has weighed on sentiment, prompting the board to keep rates steady at its latest meeting. Future tightening will hinge on wages, inflation, financial conditions, and geopolitical risks. Policymakers will assess whether accommodative conditions persist and how broadly wage gains and “beginning-of-period price hikes” spread. While external risks may lift prices and dampen growth, inflation is expected to trend higher. Policymakers emphasized the need to adjust policy without delay if conditions hold, while avoiding sustained inflation above 2%.