TOKYO–Japan’s central bank held rates steady on Friday, avoiding a surprise that would have jolted markets already unnerved by fiscal anxiety.
The Bank of Japan’s first meeting of the year took place against a dramatic backdrop of bond market gyrations, worries about government policies and a volatile yen.
Given that, it will come as some relief that policymakers at the BOJ continued a cautious approach to tightening and maintained an upbeat outlook on the economy.
Following a landmark move last month to raise the policy rate to 0.75%–the highest in three decades—markets had expected the BOJ to hold steady as it gauges the effects of the move and weighs the risks of a shifting fiscal landscape.
One of the bank’s policy board members, Hajime Takata, proposed a hike to 1% at Friday’s meet but was defeated by a majority vote
BOJ Gov. Kazuo Ueda has stuck to the stance that the bank is committed to continuing tightening under the right economic and price conditions. Data released earlier back that view, with underlying inflationary pressure remaining firm even as price growth eased late last year.
Economists interpreted the central bank’s latest outlook as a further sign that rate hikes are coming, the only question is when.
Marcel Thieliant at Capital Economics pointed out that the BOJ didn’t cut any of its inflation forecasts despite large energy subsidies announced by Prime Minister Sanae Takaichi.
The central bank stuck to the view that underlying inflation, which strips out volatile and temporary factors, will reach its 2% target in the near future.
With inflation-adjusted policy rates still deeply negative, “further policy tightening is therefore all but guaranteed,” the economist said, now seeing a risk that the BOJ might hike before July.
The Nikkei Stock Average extended gains Friday afternoon after the BOJ lifted growth projections, while the benchmark 10-year government bond yield turned higher to reach 2.25% on speculation of additional rate hikes.
The bank nudged down its growth forecast for the year ending in March 2028, but raised projections for this fiscal year and the following one, indicating that it expects the Japanese economic recovery to stay on track.
However, those forecasts may change once more details of the government’s fiscal policies emerge.
Prime Minister Takaichi dissolved the lower house of parliament on Friday to clear the way for an election that could strengthen her political mandate.
When she announced the move earlier this week, the popular prime minister said her party was mulling a plan to suspend the national sales tax on food and beverages for two years as an inflation-relief measure.
That stoked fears of fiscal overreach, sending Japanese government bonds tumbling. Trading has since stabilized, and some analysts see little cause for fiscal alarm.
“Japan’s government deficit has nearly vanished and is now the smallest in the G-7, while debt-to-GDP has fallen below its pre-pandemic level,” said Stefan Angrick at Moody’s Analytics.
Barring a major economic shock, he expects the BOJ to lift rates to 1% in July.
But a brisk pace of tightening would be difficult to justify if inflation, wage growth or economic momentum fall short of the BOJ’s projections, Angrick said. “We think that outcome looks likely.”
