The Bank of Japan kept its policy rate at 1.25% and officially recognized the 2% inflation target for the first time in 13 years. The key point in the decision was the shift to a current assessment of inflation.
The Bank of Japan kept its short-term policy rate at the current level of 1.25% in this decision. The market’s main focus was not the level of interest rates but how inflation was assessed: underlying inflation was judged to be at a level that is “generally consistent” with the 2% target. This marks the first official reaffirmation since 2013 that the 2% target remains in place.
The decision to keep rates unchanged was supported by 8 of the 9 Policy Board members. Committee Member Takata, regarded as hawkish, voted against the decision and argued for a rate increase to 1.50%, but the proposal was rejected. The Bank raised the rate from 1.00% to 1.25% last September, and the decision to hold this time is viewed as reflecting a desire to assess the impact of that rate hike.
The key developments this time were the shift to a current assessment of inflation and the revision to the FY2027 inflation outlook. The outlook in the Outlook for Economic Activity and Prices was updated from a view that inflation would gradually rise to an assessment of current conditions. The FY2027 CPI forecast was revised up from 2.4% to 2.6% excluding fresh food, and from 2.6% to 2.7% excluding fresh food and energy.
The ETF sales policy was also expanded substantially. The Bank said it would increase the annual book-value-based sales volume from ¥330 billion to ¥860 billion starting next January. This will shorten the period required to fully dispose of its ETF holdings from 112 years to 43 years.