Bank of Japan holds rates at 1.25%, says underlying inflation has reached 2% target

On October 30, the Bank of Japan announced it would keep its overnight call rate unchanged at 1.25%, in line with market expectations.

The monetary policy committee approved the decision by a vote of 8 to 1, with board member Takata Hajime the sole dissenter, arguing for a 25 basis point rate hike.

The Bank of Japan also said that the underlying inflation rate, which strips out fresh food and energy prices, has now essentially reached the 2% policy target, and is expected to remain near that level going forward. It reiterated that it will continue to raise interest rates if economic and inflation trends develop as expected.

Inflation continues to face upside risks, market expects a possible rate hike in December

The Bank of Japan noted that rising energy prices, a weak yen and growing AI-related demand could further push up inflation expectations, causing the underlying inflation rate to persistently exceed the 2% policy target.

The central bank narrowed its forecast range for core consumer price index (CPI) growth in the fiscal year ending March 2027 to 2.4% to 2.5% from a previous 2.3% to 2.6%, while raising its economic growth forecast for the current fiscal year to 0.7% to 0.8% from 0.6% to 0.7%.

Analysts at Capital Economics believe the Bank of Japan's statement shows its long-running effort to push inflation to the 2% target has borne fruit, creating conditions for further rate hikes. The firm expects the Bank of Japan to raise rates again in December this year and to lift the policy rate to 2% by mid-2027.

Speeding up ETF sales, annual disposal scale raised to 860 billion yen

In addition to the rate decision, the Bank of Japan also announced it will accelerate the sale of exchange-traded funds (ETFs) it previously bought to stimulate the economy.

Starting in January 2027, the annual ETF sale scale will be raised to about 860 billion yen from the previously planned 330 billion yen, more than doubling.

This arrangement means the Bank of Japan will speed up the reduction of financial assets accumulated during the long period of loose policy, further advancing the normalization of monetary policy.

After the decision was announced, the yen strengthened slightly, with the dollar falling as much as 0.2% against the yen; Japanese stocks, meanwhile, were dragged down by a continued decline in technology shares, with the Nikkei 225 index extending its losses to 2.3%.