Bank of Japan Keeps Rate Steady at 0.75% and Lifts Growth Outlook Ahead of February Election

Tokyo, Jan. — The Bank of Japan (BOJ) held its short-term policy rate at 0.75% on Friday and issued a more optimistic outlook for economic expansion, signaling cautious confidence as the country heads toward a snap general election on 8 February.

Higher growth projections

The central bank now anticipates real gross domestic product will rise 0.9% in the fiscal year ending March 2026, up from the 0.7% forecast published in October. For the following fiscal year, the projection was lifted to 1% from 0.7%. Policymakers cited a gradual recovery in overseas demand, supportive government measures and easy financial conditions as the main drivers behind the upgraded estimates.

Friday’s policy statement described a “virtuous cycle” in which wage gains and price increases reinforce one another, helping domestic demand offset lingering global uncertainties. The bank expects this feedback loop to remain intact as other major economies return to growth.

Split decision keeps policy unchanged

The decision to keep the benchmark rate steady was backed by eight of the nine board members, maintaining the stance adopted in December when the BOJ lifted rates to their highest level in three decades. Board member Hajime Takata dissented, advocating an immediate hike to 1% on the view that upside risks to prices were mounting.

Governor Kazuo Ueda told reporters that additional increases will be considered if current projections for activity and inflation are realized. He also noted that the recent climb in long-term bond yields has been swift, and the BOJ stands ready to act swiftly if market moves become disorderly.

Inflation releases and outlook

Data published earlier in the day showed headline consumer prices rising 2.1% in December, the lowest reading since March 2022 yet above the BOJ’s 2% target for a 45th consecutive month. “Core-core” inflation, which excludes volatile food and energy items, registered 2.9%.

The central bank still expects overall inflation to slip below 2% in the first half of the year. Nevertheless, officials said underlying price momentum remains firm, underpinned by steady wage growth and service-sector costs that continue to run above target.

Market participants broadly share the view that any further policy normalization will unfold gradually. State Street Investment Management projects one quarter-point increase in 2026 and another in 2027, leading to a terminal rate of 1.25%. The firm added that a sharper yen depreciation — specifically, a breach of ¥160 per U.S. dollar — could accelerate the timetable, potentially prompting two rate moves in 2024 and an earlier terminal rate of 1.5%.

Political backdrop

Prime Minister Sanae Takaichi dissolved the Lower House on Friday, setting the stage for the early February ballot. Takaichi, who assumed office on 21 October, has emphasized the need for accommodative monetary policy and large-scale fiscal support to revive growth. Her government drafted a record ¥108 trillion ($783 billion) budget for the fiscal year beginning 1 April and approved a ¥19.9 trillion ($135 billion) stimulus last year aimed at easing cost-of-living pressures.

The administration faces criticism over the economy’s 0.6% quarter-on-quarter contraction in the July–September period, which translated to an annualized decline of 2.3%. The election outcome could therefore influence the pace and direction of future policy adjustments.

Imagem: Finances

Bond and currency moves

Despite rate hikes over the past year, Japanese government bond yields have continued to climb, touching multi-decade highs in recent weeks. The higher yields have coincided with increased fiscal concerns and contributed to capital outflows, weakening the yen by roughly 4.6% against the dollar since Takaichi took office.

Finance Minister Satsuki Katayama recently voiced “deep concern” over what she described as one-sided currency moves. After meetings in Washington, she said U.S. Treasury Secretary Scott Bessent shared her unease about the yen’s decline. Katayama added on Friday that the recent bond-market sell-off appeared to be stabilizing but promised to monitor conditions “with a high sense of urgency.”

Governor Ueda echoed those comments, stating that market volatility remains elevated and merits close scrutiny. He reiterated the BOJ’s readiness to conduct bond-purchase operations or other measures if necessary to smooth excessive swings.

Path to normalization

In March 2024 the BOJ ended the world’s last negative-rate policy, a milestone that marked the beginning of a carefully calibrated exit from ultra-loose settings introduced more than a decade ago. Officials have since emphasized that additional hikes will depend on sustained wage growth and stable, above-target inflation.

While higher borrowing costs could support the yen and moderate imported inflation, they also risk placing extra pressure on heavily indebted firms and public finances. Japan’s debt-to-GDP ratio exceeds 250%, the highest among advanced economies, according to International Monetary Fund data.

For now, the central bank appears comfortable waiting for incoming data on wage negotiations and corporate pricing behavior, both pivotal to confirming the durability of price momentum. Analysts will pay close attention to the spring shuntō wage talks and first-quarter GDP figures for additional clues.

Key numbers at a glance

• Policy rate: 0.75%, unchanged (8–1 vote)
• FY 2025 (ending March 2026) GDP forecast: 0.9%, up from 0.7%
• FY 2026 GDP forecast: 1.0%, up from 0.7%
• December headline inflation: 2.1% year-on-year
• December core-core inflation: 2.9% year-on-year
• Snap election date: 8 February

With the campaign underway, investors will watch whether Takaichi’s platform of continued stimulus gains voter support and how a new mandate might shape the BOJ’s gradual path toward policy normalization.

Crédito da imagem: Kazuhiro Nogi | AFP | Getty Images