BOJ holds at 1.0%. But it leaves the door open to more hikes.

At its July 30–31 Monetary Policy Meeting, the BOJ held the policy rate (the target for the uncollateralized overnight call rate) at around 1.0%. Having delivered its first hike in 31 years only in June (0.75% → 1.0%), this time it paused. The vote was 8 in favor and 1 against, with board member Hajime Takata, known as a hawk, dissenting in favor of a rate hike (Governor Ueda, who had been hospitalized, returned and chaired the meeting).

Even as a hold, the substance leaned forward. In the Outlook Report released at the same time, the BOJ went a step further, projecting that inflation will run "clearly above 2%" from the second half of fiscal 2026. The reasons: pass-through of wage increases into prices, higher crude oil, and a roughly 40-year-low yen. It also upgraded its real GDP growth forecast. The BOJ reaffirmed its stance toward further tightening, stating that "if the economy and prices evolve in line with the outlook, it will continue to raise the policy rate."

For a long time the BOJ's policy rate sat in negative territory at −0.1%. The turning point was the exit from negative rates in March 2024. It then climbed the staircase one step at a time — 0.25% in July of that year, 0.5% in January 2025, 0.75% in December 2025, and 1.0% in June 2026. This July, it is holding at that 1.0%.

While other economies are in a phase of "coming down the mountain," Japan is at the stage of "finally starting to climb." Even so, 1.0% is still quite low compared with the US (3.6%) or the UK (3.75%). This large rate gap has been the main driver of the persistent weak yen. As hikes proceed, that gap will gradually narrow.

The latest core CPI (excluding fresh food) is +1.4% year-on-year, below the 2% target. That the BOJ nonetheless maintains its tightening bias is because it places weight on the outlook for prices ahead. The July Outlook Report presented the view that inflation will run "clearly above 2%" from the second half of fiscal 2026.

Core-core CPI, which excludes energy and food, is also +1.9%, so the underlying trend in prices is closing in on 2%. On top of the pass-through of wage increases into prices, higher crude oil and a roughly 40-year-low yen push inflation up through import prices. The BOJ cited these three as grounds for inflation running clearly above 2%. With the real GDP growth forecast also upgraded, it can be said that the conditions for resuming rate hikes are falling into place.

Beyond rates, the BOJ is also advancing normalization by reducing the purchases of the Japanese government bonds (JGBs) it has kept buying in large volumes. The plan is to fix the reduction at around 2 trillion yen per month from April 2027 onward, proceeding while heeding a sharp rise in long-term yields and prioritizing market stability.

The BOJ is reducing its purchase amount step by step each quarter, trimming to around 2 trillion yen per month in January–March 2027, after which it will halt the reductions. Raise rates while avoiding sudden swings in the JGB market — the challenge for the BOJ is to advance this "two-front normalization" carefully, so as not to surprise the market.

Monetary policy is decided by majority vote of the 9 Policy Board members at the Monetary Policy Meetings held 8 times a year. The composition is 1 Governor, 2 Deputy Governors, and 6 other members. This time all 9 attended, and the hold was decided 8 in favor, 1 against. The dissenter, Takata, argued for a rate hike.

Governor Ueda chaired the meeting (at the previous June meeting he was absent due to hospitalization, and Deputy Governor Uchida stood in). The meeting was deliberated over two days, with the decision published around midday on the second day. The dissent by the hawkish Takata reflects voices within the board that "the BOJ should hurry to hike further."

There are 8 meetings a year. At the January, April, July and October meetings, the "Outlook Report" presenting the economic and price outlook is published, drawing particular market attention. With today's meeting over, the next is September 17–18.

The market's biggest interest is when the next hike comes. With a weak yen and upside inflation risks, speculation over another rate hike within the year continues to simmer. The next Outlook Report will be published at the October meeting (October 29–30). Moves in prices, wages and the exchange rate until then will sway the decisions at the September and October meetings.

The BOJ's rate heavily influences the dollar-yen exchange rate. As Japan's rates rise and the gap with the US narrows, in principle a force toward a stronger yen should be at work. This hold was also "within expectations," but the yen sits near a roughly 40-year low, and just before the meeting FX intervention was suspected. The large rate gap remains a weight on the yen.