The Bank of Japan kept rates on hold but said for the first time that Japanese inflation has reached its 2% target, signalling more rate increases to come. Its decision ended a week in which every dissenting central banker, in Tokyo and Washington, wanted higher rates.
The Bank of Japan kept its policy rate at 1.25% on Friday, as every one of 53 economists surveyed by Bloomberg had expected. The vote was 8–1. Board member Hajime Takata dissented and proposed raising the rate to 1.5%.
The decision itself mattered less than what came with it.
For the first time, the BoJ said underlying inflation in Japan has reached its 2% target. That is a significant shift. For more than two decades, the BoJ tried to push inflation up to 2% after years of deflation. Now it says it has achieved that, and its focus changes to keeping inflation from rising too far.
The bank raised its inflation forecast for 2027 to 2.6% and said policy has entered a new phase, with room to raise rates every few months.
Takata argued that because inflation has reached the target, the BoJ should move towards a neutral rate more quickly. He was outvoted, but his view is likely to gain support.
Hawkish central banks
Friday’s decision completed a notable week for global monetary policy. Every dissenting vote at the BoJ and the Federal Reserve favoured higher rates. Two days earlier, two Fed officials, Lisa Cook and Beth Hammack, voted for an increase when the Fed held at 3.75–4%. Canada raised rates. The ECB and the Reserve Bank of New Zealand held. The Bank of England is expected to raise rates next week.
The reason is the same everywhere: inflation driven by high energy prices from the Iran war. Brent ended October up 13.6%. Central banks that expected to cut rates this year are now debating how much more they need to raise them.
The yen strengthened to about 157 per dollar after the decision, its third straight daily gain. A stronger yen helps Japan by making imported fuel and food cheaper. But the move was limited, because the Fed’s own hawkish stance continues to support the dollar.
Impact on India?
The BoJ matters to India mainly through the yen carry trade. For years, global investors have borrowed in yen at very low rates and invested in higher-yielding assets, including emerging-market shares. As Japanese rates rise and the yen strengthens, those trades become less profitable and sometimes have to be unwound, which means selling emerging-market assets.
A BoJ planning to raise rates every few months, combined with a Fed that may hike in December, means global borrowing costs are still rising. That is difficult for India, where foreign investors have already taken out more than ₹3 lakh crore this year and the rupee is near record lows.
It also puts pressure on the RBI. With the Fed, the BoJ, the Bank of Canada and probably the Bank of England all tightening, it is hard for the RBI to pause after this month’s rate increase, even though Indian industrial growth is slowing.
The BoJ’s next meeting is on 18 December, the same week as the Fed’s.
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