Bank of Japan leaves rates unchanged in January

BOJ holds rates steady: On 22–23 January, the Bank of Japan (BOJ) decided by an eight-to-one vote to keep its policy rate at 0.75%, having hiked by a quarter point at its last meeting in December. The decision was widely expected by economists.

Election uncertainty helps prompt pause: In comments made to the press after the decision, Governor Kazuo Ueda emphasized that the BOJ would “like to scrutinize” how past rate hikes have affected the economy before making future decisions. In addition, the snap election recently called by the Prime Minister has made the economic outlook more uncertain, further pushing the BOJ to play it safe. Meanwhile, the BOJ revised up its forecasts for GDP growth in FY 2025 (the fiscal year ending March) and FY 2026 by 0.1 percentage point and 0.3 percentage points, respectively, to 0.8% and 1.0%, while revising its projection for FY 2027 down by 0.2 percentage points to 0.8%. Regarding inflation, it slightly upped its forecast for inflation in FY 2026 by 0.1 percentage point to 1.9%.

One or two hikes projected ahead: Almost all of our panelists see the BOJ hiking in 2026, with the majority seeing an increase of 25 basis points and most of the others two increases totaling 50 basis points. The key question remains the timing. Our panelists see April as the earliest possible date, with many Japanese firms set to adjust wages in April, the data of which will reveal how much rising prices are pushing up labor costs and therefore underlying inflation. Still, the Governor emphasized that April data was not “necessarily” the most important factor in determining the timing of the next hike. Other key factors that the BOJ will watch include how government policy affects the debt and foreign exchange markets, with Japanese bond prices and the yen recently plunging after the Prime Minister announced a snap election in January. The BOJ’s next decision will be announced on 19 March.

Panelist insight: EIU analysts now expect the BOJ to hike more ahead: “Reflecting sustained trends of firm inflation and wage growth, we now forecast that the Bank of Japan (BOJ, the central bank) will implement a 25-basis-point increase in its policy rate every six months or so. This will lead to a cumulative 50-basis-points rise in the policy rate to 1.25% by early 2027, doubling the amount of interest-rate increases in our previous forecast.” Goldman Sachs’ Akira Otani said: “Based on this decision and Governor Ueda's press conference, we continue to expect that BOJ rate hikes will revert from the once-a-year pace seen in 2025 to a semi-annual pace, as seen before the announcement of the Trump tariffs, and our base case scenario is for the next rate hike to be in July 2026. However, there is much uncertainty around the timing of the next rate hike.”

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