The Bank of Japan (BOJ) unanimously voted to keep the short-term interest rate at 0.5 %, as expected, and sharply raised its inflation forecasts. In its July Outlook Report the Bank projects that core CPI inflation will reach 2.7 % in fiscal 2025 (previously 2.2 %), with similar upward revisions for 2026 and 2027. The so-called core-core CPI (excluding food and energy) was also revised up to 2.8 % for 2025. The BOJ reiterated that real interest rates remain exceptionally low and that it will continue raising rates if the economy and inflation evolve in line with its projections. At the same time the Bank pointed to growth risks, particularly from trade-policy uncertainty and weak exports. After the decision and minutes were released the yen initially strengthened, but the move was erased during Governor Ueda’s press conference.
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Create account Try a demo Download mobile app Download mobile appBOJ leaves interest rates unchanged. Source: xStation 5
- Interest rates: Unchanged at 0.5 %; unanimous decision (9–0)
- Inflation forecasts revised up:
- Core CPI (FY 2025): +2.7 % (previously +2.2 %)
- Core-core CPI (FY 2025): +2.8 % (previously +2.3 %)
- Stance: BOJ will raise rates if the economy and inflation meet expectations
- Risks:
- Inflation risks now “roughly balanced”
- Economic risks still skewed to the downside
- Trade policy: The US-Japan deal reduces uncertainty
Headline and core inflation in Japan versus average earnings, y/y data. Source: xStation 5
Despite nominal consumption growth, retail sales have been flat for twenty years once inflation is stripped out. Source: xStation 5
At the press conference Governor Ueda highlighted recent trade progress, especially the US-Japan agreement, calling it “a big step forward” that reduces uncertainty about the economic outlook. He said Japan’s economy is recovering moderately, though pockets of weakness remain, and stressed that monetary policy will stay data-dependent with no preset path. Ueda assured that the BOJ will decide meeting by meeting, watching risks and core inflation, which he said is gradually rising. He added that while inflation risks have increased—particularly after the trade deal, the Bank must stay alert to global trade tensions and their impact on sentiment, wages and pricing behaviour.
Ueda offered no specific timetable for further hikes but said the Bank is no longer in a holding phase of policy normalisation. He noted that the probability of hitting the inflation forecasts “has risen somewhat” and downplayed fears that the BOJ is behind the curve. He also mentioned the need to monitor second-round effects from food prices and to remain cautious given prolonged trade uncertainty. Overall, his remarks suggested the BOJ is ready to resume tightening if the inflation outlook materialises and geopolitical uncertainty improves. For now, the BOJ remains in wait-and-see mode. In reaction, the yen resumed weakening against the U.S. dollar. Ueda added that current yen levels are not far from the Bank’s projections.
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